The dollar index (DXY00) on Tuesday rose by +0.12%.  The dollar recovered from early losses on Tuesday and posted modest gains as weakness in stocks boosted liquidity demand for the dollar. The dollar also garnered some support Tuesday after S&P Global Ratings affirmed its AA+ long-term rating and A-1+ short-term rating on US debt and said the US can maintain its credit strength despite the fiscal hit of its recent spending bill because tariff revenues will "generally offset weaker fiscal outcomes."

Lower T-note yields on Tuesday were bearish for the dollar.  Also, signs of progress in peace talks over Ukraine are curbing safe-haven demand for the dollar.  Losses in the dollar are limited due to concern that last week's stronger-than-expected July CPI and PPI reports could keep the Fed from cutting interest rates at next month's FOMC meeting.

Tuesday's US housing news was mixed for the dollar.  US Jul housing starts unexpectedly rose +5.2% m/m to a 5-month high of 1.428 million, stronger than expectations of a decline to 1.297 million.  However, Jul building permits, a proxy for future construction, fell -2.8% m/m to a 5-year low of 1.354 million, weaker than expectations of -0.5% m/m to 1.386 million.

Ukrainian President Zelenskiy said late Monday that he came away with a commitment from President Trump to join security guarantees for any peace deal and reserve discussion on territorial swaps with Russia for later.  President Trump is pushing for a summit between Presidents Putin and Zelenskiy in the near future, and European leaders are discussing a plan to send British and French troops to Ukraine as part of a peace agreement.  The outcome could have macroeconomic implications regarding tariffs and oil prices, and could, of course, have significant consequences for European security.

The markets continue to adjust to the inflation outlook following last Thursday's hawkish PPI report. Following the report, the markets erased any hopes of a -50 bp rate cut at the Fed's September meeting and pulled back expectations for a -25 bp rate cut to 84% area from 93% before the report.

Federal funds futures prices are discounting the chances for a -25 bp rate cut at 87% at the September 16-17 FOMC meeting and at 54% for a second -25 bp rate cut at the following meeting on October 28-29.

EUR/USD (^EURUSD) Tuesday fell by -0.15%.  The euro gave up an early advance and turned lower on Tuesday after the dollar rebounded from early losses and moved higher.  The euro initially moved higher on Tuesday on signs of progress in peace talks over Ukraine.  US and European officials said they will immediately work on providing Ukraine with robust security guarantees to open a path for a meeting between Presidents Putin and Zelenskiy. 

Swaps are pricing in a 7% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.

USD/JPY (^USDJPY) Tuesday fell by -0.28%.  Higher Japanese government bond yields on Tuesday strengthened the yen's interest rate differentials and boosted the yen after the 10-year JGB bond yield rose to a 3-week high of 1.604%.  Also, lower T-note yields on Tuesday were supportive of the yen.  Gains in the yen were limited by concern that US tariff policies would harm the Japanese economy.

December gold (GCZ25) on Tuesday closed down -19.30 (-0.57%), and September silver (SIU25) closed down -0.697 (-1.83%).  Precious metal prices tumbled to 2-week lows on Tuesday.  Dollar strength on Tuesday undercut metals prices.  Also, signs of progress in peace talks over Ukraine have curbed some safe-haven demand for precious metals.  US and European officials said they will immediately work on providing Ukraine with robust security guarantees to open a path for a meeting between Presidents Putin and Zelenskiy.  In addition, reduced chances for a Fed rate cut at next month's FOMC meeting are bearish for precious metals, following a bearish July PPI report last Thursday that knocked the chance of a Fed rate cut down to 84% from 93% before the report.

Silver prices gave up an early advance Tuesday and turned lower on demand concerns for industrial metals after US Jul building permits, a proxy for future construction, fell more than expected to a 5-year low.

Lower T-note yields on Tuesday were supportive of precious metals.  Gold continues to have safe-haven support related to US tariffs and geopolitical risks, including the conflicts in Ukraine and the Middle East. Fund buying of precious metals continues to support prices after gold holdings in ETFs rose to a 2-year high last Friday, and silver holdings in ETFs reached a 3-year high Monday.