The dollar index (DXY00) on Wednesday rose by +0.22%.  The dollar whipsawed higher on Wednesday after recovering from a 3.5-year low.  The dollar initially retreated on Wednesday after the FOMC cut interest rates by -25 bp and signaled another -50 bp of rate cuts by year's end.  However, the dollar recovered its losses and turned higher on hawkish comments from Fed Chair Powell, who said higher goods prices are feeding through to inflation and that the FOMC expects inflation to continue to build into next year, which may limit how much more the Fed can cut interest rates.

US Aug housing starts fell -8.5% m/m to 1.307 million, weaker than expectations of 1.365 million. Aug building permits, a proxy for future construction, unexpectedly fell -3.7% m/m to a 5.25-year low of 1.312 million, weaker than expectations of an increase to 1.370 million.

The FOMC, as expected, voted 11-1 to cut the federal funds target range by -25 bp to 4.00%-4.25% from 4.25%-4.50% and said, "downside risks to employment have risen, but inflation has moved up and remains somewhat elevated."

The Fed's dot plot projects the fed funds target at 3.625% by the end of 2025, signaling another -50 bp of rate cuts this year.  The fed funds target range for the end of 2026 is 3.375%, signaling one -25 bp rate cut in 2026.

The FOMC boosted its 2025 US GDP estimate to +1.6% from +1.4% in June, and kept its 2025 core PCE inflation estimate unchanged from June at +3.1%, which is well above the Fed’s inflation target of 2%. 

Fed Chair Powell said the revised jobs numbers mean the labor market is no longer solid, and the Fed's move to cut interest rates to a "more neutral" position will "presumably" be helpful to the labor market.  However, he added, "We have begun to see" higher goods prices feed through to inflation, and "we do expect them to continue to build" even into next year.

The dollar is being undercut by concerns over Fed independence, which could prompt foreign investors to dump dollar assets as President Trump attempts to fire Fed Governor Cook, and by Stephen Miran's intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors. 

US Aug housing starts fell -8.5% m/m to 1.307 million, weaker than expectations of 1.365 million.  Aug building permits, a proxy for future construction, unexpectedly fell -3.7% m/m to a 5.25-year low of 1.312 million, weaker than expectations of an increase to 1.370 million.

Following Wednesday’s -25 bp rate cut, the markets are now pricing in a 90% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.

EUR/USD (^EURUSD) on Wednesday fell by -0.24%.  The euro fell from a 4-year high on Wednesday and turned lower after the dollar recovered from early losses and moved higher. Also, Wednesday's downward revision to Eurozone Aug CPI is dovish for ECB policy and negative for the euro. 

Central bank divergence is supporting the euro, as the markets view the ECB as largely finished with its rate-cut cycle, while the Fed is expected to cut rates by roughly two more times by the end of this year.

Eurozone Aug CPI was revised lower to +2.0% y/y from the previously reported +2.1% y/y.  The Aug core CPI was left unrevised at +2.3% y/y.

Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.

USD/JPY (^USDJPY) on Wednesday rose by +0.13%.  The yen fell from a 2.25-month high against the dollar on Wednesday and turned lower after the dollar rebounded on hawkish comments from Fed Chair Powell.  Losses in the yen accelerated on Wednesday after T-note yields recovered from early losses and moved higher. 

The yen initially moved higher on Wednesday on carryover support from Tuesday, when Japanese Minister of Agriculture Koizumi said he would run in the party leadership race of the ruling Liberal Democratic Party.  Koizumi is seen as hawkish on fiscal policy and less likely to try to influence the BOJ's interest rate path. 

Japanese trade news was mixed for the yen.  Japan Aug exports fell -0.1% y/y, a smaller decline than expectations of -2.0% y/y. Aug imports fell -5.2% y/y, weaker than expectations of -4.1% y/y.

December gold (GCZ25) on Wednesday closed down -7.30 (-0.20%), and December silver (SIZ25) closed down -0.765 (-1.78%).  Precious metal prices moved lower on Wednesday due to a stronger dollar.  Silver prices extended their losses on Wednesday after US Aug housing starts and building permits fell more than expected, a bearish factor for industrial metals demand.

Precious metals found support on Wednesday after the FOMC cut interest rates by -25 bp and signaled -50 bp more of rate cuts by year's end.  However, gold prices fell more than -$20 an ounce in post-market trading on Wednesday afternoon on hawkish comments from Fed Chair Powell, who said higher goods prices are feeding through to inflation and the FOMC expects inflation to continue to build into next year, which may limit how much more the Fed can cut interest rates.

On Tuesday, nearest-futures (U25) gold posted an all-time high of $3,698.60 an ounce, and nearest-futures (U25) silver posted a 14-year high.  Gold prices continued to receive safe-haven support from uncertainty tied to US tariffs and President Trump's attacks on Fed independence as he attempts to fire Fed Governor Cook, and by Stephen Miran's intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors. Geopolitical risks and political uncertainty in France and Japan are also driving demand for gold as a safe-haven asset.  French Prime Minister Bayrou resigned after losing a confidence vote in parliament last week.  Also, Japanese Prime Minister Ishiba resigned last week following two election results that stripped Japan's ruling Liberal Democratic Party of its majorities in both houses of parliament, which is seen as paving the way toward a more expansionary fiscal policy. 

Precious metals prices continue to receive support from fund buying of precious metal ETFs.  Gold holdings in ETFs rose to a 2.25-year high on Tuesday, and silver holdings in ETFs rose to a 3-year high on September 3.