New York Gold, Bonds, and Dollar: 'Oil Price Drop vs. Tightening Concerns'... Dollar, Interest Rates, and Gold Prices Decline Together

[Mexico City = Shim Young-jae, Correspondent] The New York financial market saw both the dollar and U.S. Treasury yields decline ahead of the Federal Reserve's (Fed) monetary policy decision. As tensions between the U.S. and Iran eased somewhat, international oil prices plummeted, leading to a retreat in inflation concerns. However, the market refrained from making aggressive directional bets ahead of the Fed's interest rate decision and Chairman Kevin Warsh's press conference.

The dollar showed weakness against major currencies, and U.S. Treasury yields fell across the board. The dollar-won exchange rate reflected the dollar's weakness and declining interest rates, dropping to the 1452 won level. In contrast, gold fell by more than 1% as it could not withstand the Fed's tightening concerns and recent profit-taking pressures despite the dollar's weakness.

Dollar Index at 101.094... Taking a Breather Near One-Month High Ahead of Fed

On the 28th (local time), the dollar index, which indicates the value of the dollar against six major currencies, traded at 101.094, down 0.116 points (0.11%) from the previous trading day. The previous day's closing price was 101.210.

The dollar index moved around 101.20 in the early session, rising to around 101.30 during Asian and European trading hours. However, as New York trading hours began, it expanded its decline, dropping to around 100.95 before rebounding slightly to the 101.09 level.

While it maintained a level close to the one-month high of around 101.80 recorded last month, the dollar buying momentum temporarily slowed ahead of the Fed's decision.

The euro rose 0.2% against the dollar to record 1.1393 dollars, while the pound traded at 1.3288 dollars, up 0.1%. The dollar-yen exchange rate remained relatively unchanged around 163.77 yen.

The slight decline in the dollar was attributed to the sharp drop in international oil prices. As military tensions between the U.S. and Iran eased and President Trump made positive remarks about negotiations with Iran, concerns about oil supply disruptions receded. The drop in oil prices raised expectations that inflationary pressures could ease, partially reversing the recent dollar strength.

However, the extent of the dollar's weakness was limited. The possibility of the Fed raising rates at this meeting had not completely disappeared, and expectations for a rate hike in September remained high.

According to LSEG, the likelihood of the Fed raising the benchmark interest rate by 0.25 percentage points on the 29th was reflected at about 40%, a significant increase from about 20% a week ago. The probability of a rate hike by September was assessed at around 95%.

Cal Shamota, Chief Market Strategist at Cope, commented, "Investors are securing liquidity and increasing dollar buying positions ahead of the Fed's decision." He explained that if the Fed actually raises rates, the dollar could gain direct upward momentum, and even if rates are held steady, a strong message could shift the rate hike expectations to September.

However, he warned that since a significant portion of dollar buying positions had already accumulated, if the Fed signals a more dovish stance than expected, the dollar's strong positions could be quickly reversed.

Dollar-Won Exchange Rate Drops by 13.78 Won... 1452.01 Won

The dollar's weakness was also reflected in the dollar-won exchange rate. On that day, the dollar-won exchange rate recorded 1452.01 won, down 13.78 won (0.94%) from the previous trading day. The previous day's closing price was 1465.79 won.

The exchange rate started around 1465 won in the early session and briefly rose to around 1470 won. However, as the dollar index fell and U.S. Treasury yields decreased, the direction changed. During New York trading hours, it dropped to the low 1450 won range and maintained a weak trend around 1452 won in the latter part of the session.

The daily decline rate was recorded at 0.95%. Over the past five trading days, it has fallen by 1.67%, and on a monthly basis, it has decreased by 5.98%. Despite the possibility of a U.S. rate hike remaining, the significant drop in the exchange rate that day was interpreted as a result of expectations for easing import price burdens in Korea due to the sharp drop in oil prices and the calming of dollar buying momentum.

U.S. Treasury Yields Decline Across the Board... 10-Year Yield at 4.606%

The U.S. Treasury market showed strength. As bond prices rose, yields fell.

On that day, the yield on the 10-year U.S. Treasury bond recorded 4.606%, down 0.041 percentage points from the previous trading day.

The 10-year yield started around 4.64% in the early session and fell to the 4.61% range during Asian trading hours. It rebounded to around 4.63%, but during the morning of New York trading hours, it plummeted to 4.59%. In the latter part of the session, some recovery occurred, and it traded at 4.606%.

According to CNBC, the 2-year Treasury yield, sensitive to short-term rate expectations, fell by 4.2 basis points to 4.281%, while the 30-year yield dropped by 3.3 basis points to 5.092%. The 1-month yield was down 6.1 basis points to 3.696%, and the 3-month yield fell by 5.1 basis points to 3.857%.

The decline in Treasury yields was a result of the sharp drop in international oil prices and the waiting demand ahead of the Fed meeting. With hostilities between the U.S. and Iran halted, West Texas Intermediate and Brent crude prices fell sharply, reflecting the market's expectation that short-term inflationary pressures could ease.

The Fed is expected to keep the benchmark interest rate at 3.75% at this meeting. However, the outlook in the futures market showed differences depending on the reporting agency. According to CME FedWatch, the likelihood of a rate hike in September was reflected at around 56%, while related reports in the gold market indicated a 71% chance of a hold at this meeting and a 75% chance of a hike in September.

Market participants are paying more attention to Chairman Warsh's remarks than the rate decision itself. This is because whether the drop in oil prices is viewed as a temporary phenomenon or a signal of easing price pressures could change the direction of long-term Treasury yields and the dollar.

Gold Prices Drop by 1.27%... $4028.120

Gold prices also fell despite the dollar's weakness and declining Treasury yields. The price of gold dropped by $51.999 (1.27%) to $4028.120 per ounce compared to the previous trading day. The previous day's closing price was $4080.119.

Gold prices started around $4080 in the early session and continued to decline. During Asian trading hours, it fell below $4050, and in European trading hours, it dropped to just above $4020. In New York, it briefly rebounded to around $4045, but selling pressure re-entered, and it finished trading at around $4028.

According to Reuters, August U.S. gold futures were down 0.9% at $4038.70.

The decline in gold prices was influenced by the Fed's tightening possibilities and the recent accumulation of dollar strength. Although the dollar index fell slightly that day, it remained near the one-month high, continuing the price pressure on gold traded in dollars.

David Meger, Director of Metal Trading at High Ridge Futures, analyzed that high energy prices have been stimulating the Fed's inflation concerns, and the expectation that the Fed will take a tough stance is pressuring the gold market through rate hike expectations and dollar strength.

Gold is generally considered a hedge against inflation, but since it does not pay interest, rising rates can reduce its relative investment appeal. The easing of demand for safe-haven assets due to the reduction of tensions between the U.S. and Iran also contributed to the pressure.

Commerzbank has adjusted its year-end gold price forecast down by $300 to $4500 per ounce. They explained that unless rate hike expectations are reversed, it will be difficult for investment funds to continuously return to gold exchange-traded funds, and gold prices will struggle to show a stable recovery.

Fed's Message Expected to Determine Direction of Dollar, Interest Rates, and Gold

The flow of the financial market that day can be summarized as a position adjustment ahead of the Fed meeting. The drop in international oil prices acted as a factor lowering the dollar and Treasury yields, but in the gold market, tightening concerns and weakened demand for safe-haven assets were more significantly reflected.

If the Fed holds the benchmark interest rate steady while emphasizing future price moderation, the dollar index could test below the 101 level again, and the yield on the 10-year U.S. Treasury could drop below 4.60%. In this case, gold could attempt to rebound based on the dollar's weakness.

Conversely, if the Fed raises rates or strongly hints at a September hike while holding rates steady, both the dollar and Treasury yields could rise again. The dollar-won exchange rate could also return to the 1460 won level, and gold could test the support around $4000.

The U.S. GDP for the second quarter and the June personal consumption expenditure price index, to be released on the 30th, are also subsequent variables. If both economic growth and inflation appear stronger than expected, expectations for Fed tightening could strengthen. Conversely, if growth rates remain at expected levels and core inflation eases, the decline in the dollar and Treasury yields observed that day could extend.

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