Dollar Index Falls Amid Yen Intervention Concerns as Gold Prices Drop to $4,041

[Mexico City = Shim Young-jae, Correspondent] The New York financial market saw a significant divergence in asset flows due to rising U.S. Treasury yields and concerns over foreign exchange market interventions. The U.S. Treasury yields surged, particularly in long-term bonds, following comments from Federal Reserve officials about potential further interest rate hikes and rising international oil prices due to tensions in the Middle East. The dollar weakened against the Japanese yen but showed strength against the Korean won. Gold prices fell by over 1% due to a rebound in the dollar and rising interest rate pressures.

On the 31st (local time), the yield on the U.S. 10-year Treasury bond rose by 0.045 percentage points to 4.718%. The dollar index decreased by 0.119 points (0.12%) to 99.524. The dollar-won exchange rate recorded an increase of 19.76 won (1.39%) to 1,442.07 won, while gold prices dropped by $61.05 (1.49%) to $4,041.18 per ounce.

Surge in Treasury Yields Due to Fed Rate Hike Speculation and Rising Oil Prices

According to TradingView, the yield on the U.S. 10-year Treasury bond rose by about 4.5 basis points to 4.718%. The 2-year Treasury yield increased by 3.3 basis points to 4.262%, and the 30-year yield jumped by 6 basis points to 5.267%. The 10-year yield, which serves as a benchmark for various market interest rates such as mortgage and auto loans, surpassed 4.7%, with the 30-year yield also climbing to the upper 5.2% range, increasing the overall burden on the financial market.

The rise in interest rates was sparked by hawkish comments from Federal Reserve officials. The Fed previously held the benchmark interest rate steady at 3.5% to 3.75%, but the vote was split 9 to 3. Those advocating for a rate hike warned that if inflation remains above the target for an extended period, more significant tightening may be necessary in the future.

Bess Hemmick, President of the Cleveland Federal Reserve Bank, stated that action is needed now to bring personal consumption expenditure prices back to the Fed's 2% target. Neel Kashkari, President of the Minneapolis Federal Reserve Bank, argued that it is better to implement small rate hikes proactively rather than waiting for a larger move.

The rise in international oil prices also contributed to bond selling. Following Iran's announcement of attacks on two oil tankers passing through the Strait of Hormuz, West Texas Intermediate crude rose by 2.2% to $85.41 per barrel, while Brent crude increased by 1.5% to $90.36. The rise in energy prices raised concerns about renewed inflationary pressures.

However, price indicators sent mixed signals. The core personal consumption expenditure price index for June rose by 0.1% compared to the previous month, falling short of the market expectation of 0.2%, but increased by 3.3% year-on-year, still significantly above the Fed's target. The U.S. GDP growth rate for the second quarter was also 1.5%, below the market forecast of 1.8%.

Dollar Index Falls Amid Yen Intervention Concerns

In the foreign exchange market, the possibility of Japanese authorities intervening to defend the yen emerged as a key variable. The dollar weakened against the yen, leading to a decline in the dollar index, which reflects the dollar's value against major currencies.

On this day, the dollar index fell by 0.119 points (0.12%) to 99.524. It briefly rose above 100 during the day but expanded its losses as the session progressed. On a weekly basis, the dollar has fallen by about 1.6%, potentially marking its largest decline since January.

The dollar-yen exchange rate decreased by 0.8% to 158.225 yen. Following a sharp drop of 2.4% the previous day, the yen continued to strengthen. Reports emerged that the U.S. Treasury notified some banks about the possibility of yen market intervention and requested them to prepare for additional measures, raising market vigilance.

Eric Theore, a foreign exchange strategist at Scotiabank, noted that it is unclear whether there was actual intervention or if the market reacted solely to the possibility of intervention, but he diagnosed that in a thin liquidity environment, the mere possibility of intervention could lead to significant movements in the exchange rate.

Goldman Sachs strategists analyzed that if the yen reverses its gains from the previous day, there is a high likelihood that authorities will intervene further. They explained that intervention could serve as a means to buy time until Japan's fundamental conditions, such as interest rates and inflation, improve.

The Bank of Japan kept its benchmark interest rate at 1%, but the tone was hawkish. The Bank of Japan mentioned for the first time that the underlying inflation rate could exceed its target, and Governor Kazuo Ueda stated that the price outlook from policy board members is at a high level, with risks tilted to the upside. The market speculated that the Bank of Japan might implement an additional rate hike as early as September.

Dollar-Won Surges to 1,442 Won... Intervention Effect Weakens in One Day

The won exhibited a different trend compared to the yen. The dollar-won exchange rate surged by 19.76 won (1.39%) to 1,442.07 won. The previous day, speculation about the Korean foreign exchange authorities' dollar-selling intervention had pushed the won to its strongest level in nine months, but a significant reversal occurred within a day.

The won had previously shown strength around 1,418 won per dollar, but as doubts about the sustainability of the intervention effect grew, it fell to the upper 1,430 won range and then to the 1,442 won level. While there were speculations that both Korean and Japanese authorities were simultaneously intervening to defend their currencies, unlike the yen, the won was more significantly affected by rising U.S. interest rates and risk-averse sentiment.

However, on a monthly basis, the won maintained a strong trend. The value of the won is estimated to have risen by over 8% against the dollar in July, marking the largest monthly increase since March 2009.

The rebound in tech stocks and foreign purchases of domestic stocks were favorable factors for the won. Expectations for increased semiconductor exports centered around AI also supported Korea's external soundness. However, as seen on this day, if U.S. Treasury yields surge and the volatility of risk assets expands, short-term demand for dollars may strengthen again.

Gold Drops to $4,041... Monthly Uptrend Maintained

The gold market showed weakness due to the rebound in the dollar and rising Treasury yield pressures. Gold prices fell by $61.05 (1.49%) to $4,041.18 per ounce. During the day, prices dipped to around $4,030 but recovered some losses, failing to regain the $4,100 level.

Gold tends to lose relative investment appeal when the dollar value rises or Treasury yields increase. Although the dollar index itself fell on a closing basis, there were intraday rebounds, and the significant rise in U.S. Treasury yields led to increased gold selling.

Han Tan, Chief Market Analyst at Bybit, assessed that gold has a higher chance of ending its four-month decline but is struggling to expand its gains sufficiently above the psychological resistance level of $4,000. However, he explained that expectations that the Fed could consider not only inflation but also growth and financial market conditions contribute to the support of the $4,000 level.

Despite the drop in gold prices on this day, it is projected to have risen by about 1.1% in July, marking the largest monthly increase since February. The expectation of further rate hikes by the Fed has somewhat diminished, and the decline in international oil prices at the beginning of the month supported monthly gold prices.

Market participants are now turning their attention to the U.S. employment data to be released next week. If the June Job Openings and Labor Turnover Survey and July Non-Farm Payrolls are stronger than expected, the possibility of further Fed rate hikes may increase again, putting upward pressure on Treasury yields and the dollar. Conversely, if employment slows down, the recently surging long-term yields may correct, and gold prices may attempt to rebound around the $4,000 level.