[New York Gold, Bonds, Dollar] Interest Rates and Dollar Strength Pause... Oil Prices Drop, Won and Gold Prices Rebound

[Mexico City = Shim Young-jae, Correspondent] On the 25th (local time), the financial market in New York saw a pause in the trend of 'rising interest rates and a strong dollar' that had dominated the week. U.S. Treasury yields, which had soared to a 19-year high the previous day, fell after experiencing volatility during the day, and the dollar also showed weakness due to the drop in international oil prices and short-term profit-taking. The dollar's weakness and the decline in long-term interest rates supported gold prices. The dollar-won exchange rate also fell significantly, highlighting the strength of the won.

However, it is difficult to view this day's movements as a signal that concerns over U.S. tightening have eased. This is because Federal Reserve officials have indicated a heightened vigilance regarding inflation following last week's 25 basis point increase in the benchmark interest rate, the first in three years, which has been reflected in the financial market pricing for further rate hikes. In fact, the yields on 10-year and 30-year Treasury bonds have risen to their highest levels since 2007 and 2004, respectively, this week. The Fed raised the benchmark interest rate by 25 basis points to 3.75-4.00% on the 16th.

10-Year Yield at 5.167%... Taking a Breather After Hitting a 19-Year High

Source = TradingView

The U.S. Treasury market showed mixed results across maturities. According to TradingView, the yield on the 10-year Treasury bond was 5.167%, down 4.1 basis points from the previous day. At one point during the day, it exceeded 5.22%, but quickly fell back, giving up all of its gains.

The absolute level of interest rates remains high. Recent energy price increases due to Middle Eastern conflicts, inflation concerns, and the possibility of further tightening by the Fed have created strong selling pressure, particularly on long-term bonds. The U.S. mortgage rates are also influenced by the rise in 10-year Treasury yields, with the average 30-year fixed mortgage rate reaching 7.03% for the week ending on the 24th.

The hawkish remarks from Fed officials have also put pressure on the bond market. Michael Barr, a Fed governor, indicated that additional policy adjustments may be expected to bring inflation back to target levels. Coupled with rising oil prices and the highest Purchasing Managers' Index (PMI) in over four years, the market has been reflecting the risks of further rate hikes.

According to the CME FedWatch, the possibility of a rate hike in October has risen to about 64-66%.

Padraig Gavi, Head of ING Americas Research, and Benjamin Schroeder, Senior Rate Strategist at ING, analyzed that significant levels of rate hike concerns and inflation risks have already been reflected in current market pricing. However, they noted that looking solely at the dynamics of U.S. government debt, Treasury yields may continue to face pressure, particularly with the swap spread in the 10-year segment potentially widening again.

Economic indicators have also heightened the Fed's concerns. August durable goods orders showed stronger results than the expected 0.3% decline. A separate capital goods order indicator reported by Reuters also indicated that corporate capital investment remains robust, signaling ongoing investment demand in the U.S. economy due to AI infrastructure investments.

Dollar Index Down 0.22% to 100.682... Oil Price Drop Halts Four-Day Strength

Source = TradingView

As bond yields took a breather, the dollar also fell.

According to TradingView, the dollar index (DXY) fell by 0.227 points (0.22%) to 100.682. The index started above the 100.90 level during the day but continued to decline, dropping to around 100.60 at one point. It later recovered some of its losses but did not regain the previous day's closing price of 100.909.

Reuters also reported that the dollar index fell about 0.3% during the day, reaching around 100.95, marking the largest daily decline in about three weeks. The dollar reversed direction after rising for four consecutive trading days, but it is likely to record a second consecutive weekly increase.

One of the direct backgrounds for the dollar's weakness was the drop in international oil prices. The possibility of a ceasefire between the U.S. and Iran alleviated some supply disruption concerns, leading to a drop of over 2% in international oil prices. However, oil prices remain high, staying above $100 per barrel, indicating that inflationary pressures from energy prices have not completely dissipated.

Eugene Epstein, Head of Trading and Structured Products at MoneyCorp, pointed out that the dollar has risen quite sharply in recent days, assessing that the day's movement is more of a short-term breather rather than a full-fledged reversal into dollar weakness. He explained that the increased likelihood of further rate hikes and the high level of Treasury yields are key backgrounds for the recent strength of the dollar.

In the foreign exchange market, the movement of the yen was also significant. The yen rose 1.06% against the dollar, reaching 157.13 yen per dollar, marking the largest daily increase since the 7th. This was influenced by Japanese authorities raising their vigilance against yen weakness.

The euro rose 0.15% to $1.1396, but on a weekly basis, it is heading for a third consecutive decline. The pound rose 0.23% to $1.3246 but did not significantly deviate from the three-month low recorded the previous day.

Dollar-Won at 1355.23 Won, Down 9.99 Won... Won Rebounds Amid Dollar Weakness

Source = TradingView

The dollar's weakness was also clearly evident in the won market.

According to TradingView, the dollar-won exchange rate fell by 9.99 won (0.73%) to 1355.23 won. The decline in the exchange rate indicates an increase in the value of the won against the dollar.

Looking at the intraday movements, the strength of the won was even more pronounced. The dollar-won exchange rate traded around 1365.22 won the previous day and briefly rose close to 1368 won, but then quickly reversed direction. After breaking below the 1360 won level, it fell to the mid-1350 won range, reaching a low of around 1352 won at one point during the day.

It later rebounded somewhat but continued to move around 1355 won, maintaining a decline of nearly 10 won from the previous day.

The strength of the won on this day is interpreted as being influenced by the drop in the dollar index and the decline in U.S. long-term interest rates occurring simultaneously. The drop in international oil prices could also act as a favorable factor for the won in terms of trade conditions and inflation burdens for South Korea, which has a high dependence on oil imports.

However, since the dollar index is still maintaining an upward trend on a weekly basis and the possibility of further rate hikes in the U.S. has increased, it is premature to conclude that the sharp drop in the dollar-won exchange rate signifies a trend of dollar weakness.

Gold at $4284.755, Up 0.20%... Weekly Decline in the 2% Range

Source = TradingView

The gold market rebounded as both the dollar and Treasury yields fell.

According to TradingView, the gold price rose by $8.605 (0.20%) to $4284.755 per ounce. The price showed significant volatility during the day. It briefly exceeded $4310 but then sharply fell below $4260. It later rose again to the $4290 range and moved in the mid-$4280 range in the latter part of the session.

According to Reuters, U.S. gold futures closed up 0.5% at $4321.20.

On a daily basis, gold prices rose, but the weekly performance was poor. Spot gold fell about 2.1% this week, marking the fourth weekly decline in the last five weeks.

The main burden remains the U.S. Treasury yields. Gold is a non-yielding asset, so when Treasury yields rise, the opportunity cost of holding gold increases. In particular, the 10-year yield has risen to its highest level in 19 years, exerting a strong negative impact on gold due to the rising interest rates outweighing the demand for gold as a safe-haven asset driven by geopolitical risks.

A senior market analyst at Bybit stated that the continuous rise in Treasury yields has led to gold's fourth weekly decline in the last five weeks. He assessed that the ongoing risks of rising inflation, soaring Treasury yields, and a hawkish Fed are simultaneously putting pressure on gold, which is a non-yielding asset.

Gold may receive support from safe-haven demand amid geopolitical uncertainties surrounding the U.S. and Iran, but in this phase, high interest rates are offsetting that support. Compared to the peak on February 27, gold prices have fallen to about 19% lower.

Oil Prices Changed Direction on the Day, but Tightening Concerns Remain... October Fed Meeting is the Next Turning Point

Source = TradingView

In summary, the flow of the New York financial market on this day can be characterized as a day where the drop in international oil prices calmed the short-term upward trends of the dollar and Treasury yields, providing room for rebounds in gold and the won.

However, the medium-term price determinants in the market remain aligned with the Fed. The Fed raised the benchmark interest rate by 25 basis points to 3.75-4.00% on the 16th, marking the first rate hike since 2023. The market is significantly reflecting the possibility of an additional hike in October.

Therefore, how long the 10-year Treasury yield stays in the 5% range will be an important variable not only for the dollar and gold but also for global risk assets. If oil prices fall further, it could lower both inflation concerns and upward pressure on interest rates, but if the situation in the Middle East worsens again and energy prices rebound, the opposite trend could emerge.