Dollar Strength Anchored by Rising Yields and Fading Cut Expectations
The U.S. Dollar Index (DXY00) closed Monday's session up 0.30%, extending gains that had carried over from the prior week. The primary driver was a renewed focus on the inflation picture: last week's CPI and PPI releases painted a picture of prices still moving faster than the Federal Reserve would like, raising the prospect that the central bank opts against a rate reduction at its upcoming FOMC meeting.
That shift in expectations sent the 10-year Treasury yield climbing to 4.35%, a two-week high, which in turn provided a tailwind for the greenback. However, the dollar's advance was capped once intraday data revealed that the August NAHB Housing Market Index slipped by one point to 32, missing consensus forecasts that had called for a rise to 34.
Underlying the dollar's gains was a broader unease among foreign investors about the degree of political influence over U.S. monetary policy. That concern surfaced after Treasury Secretary Scott Bessent's congressional appearance the previous Wednesday, in which his remarks were widely read as issuing explicit guidance to the Fed on the magnitude of any forthcoming rate moves. Market participants interpreted the tone as an attempt to constrain the central bank's independence, a development that added a layer of policy uncertainty to what was already a data-driven debate.
Looking ahead, global markets are watching today's scheduled talks between President Donald Trump and European heads of state, focused on whether any tangible progress can be made toward halting the Russia-Ukraine conflict. The outcome carries potential ripple effects across trade policy, energy pricing, and continental security architecture, all of which could reshape the macro backdrop for currency and bond markets.
Policy Pathway and Major FX Pairs
The tone of the Fed's September decision has become the central question for currency traders. Following Thursday's hawkish PPI report, market participants abandoned any lingering hopes of a 50-basis-point cut at the September 16–17 FOMC session. The probability of a standard 25-basis-point reduction dropped to roughly 84%, down from 93% before the data was released. Federal funds futures are simultaneously pricing in a 51% chance of a second 25-basis-point cut at the October 28–29 meeting.
In the euro complex, EUR/USD shed 0.32% on Monday as dollar strength took hold. The euro was additionally dragged lower by growing skepticism that the Russia-Ukraine war will reach a resolution in the near term, a sentiment reinforced by the absence of a breakthrough at last Friday's Trump-Putin summit. Derivatives markets are currently assigning only a 6% probability to a 25-basis-point rate cut by the European Central Bank at its September 11 policy meeting.
On the yen side, USD/JPY advanced 0.47% on Monday, driven by the same dollar momentum. The Japanese currency remains vulnerable to worries that Washington's tariff posture will weigh on Japan's export-dependent economy. A partial offset came from Monday's release of the June tertiary (services) index, which posted a 0.5% month-over-month increase, beating the 0.2% gain analysts had forecast.
Precious Metals Split as Yields and Safe-Haven Flows Tug in Opposite Directions
Precious-metal futures posted a mixed close on Monday. December gold (GCZ25) declined by $4.60, or 0.14%, settling at a two-week low, while September silver (SIU25) edged up by $0.054, or 0.14%.
Several headwinds pressured gold. The firmer dollar made the metal less attractive to holders of other currencies, and the climb in the 10-year Treasury yield to 4.35% raised the opportunity cost of holding a non-yielding asset. The reduced likelihood of a September Fed easing step also removed a key bullish catalyst that had underpinned the metal over recent weeks.
On the other hand, safe-haven demand provided a counterweight. The stalled diplomacy between Moscow and Washington, underscored by the unproductive Trump-Putin meeting on Friday, continued to feed risk-averse positioning. Broader geopolitical tensions, including the ongoing Middle East conflict and the specter of further U.S. tariff escalations, kept institutional demand for gold resilient.
Silver benefited from a separate catalyst: a sharp rally in Chinese equities, with the Shanghai Composite Index touching a ten-year high on Monday. The strength in Chinese stocks lifted expectations for firmer industrial metals demand, offering a modest boost to silver.
Fund flows continued to underpin the complex. Gold holdings in exchange-traded funds rose to a two-year high as of last Friday, while silver ETF positions reached a three-year peak the prior Thursday, indicating that institutional allocation to precious metals remains robust despite the recent pullback in spot prices.