The jobs report: the dollar won the first round

Last weekend I wrote that Fed chair Warsh could give the dollar a temporary lift by talking about inflation, and that this was where my thesis would be tested. The test came on Friday.

1The jobs report: the dollar won the first round

The US jobs report showed 162,000 new jobs, three times more than expected. A strong labour market means the Fed doesn't need to cut rates to help the economy. The market went from expecting a cut to now betting on a hike on 16 September. Higher rates make the dollar more attractive, so the dollar rose and gold and silver fell a little over one percent. Short term, exactly what I flagged happened.

2The national debt: two hands pulling in opposite directions

The US government is now buying back its own long-dated bonds at twice the previous scale, at least 4 billion dollars per round, with the first round this Thursday. Put simply: the state props up its own debt while the central bank talks about raising rates. That's why I'm not changing the long-term picture.

3The dollar as a weapon: China has spent fourteen years building around it

This is the point I think is most important to understand. I wrote that the more the US uses the dollar as a weapon, the more countries look for alternatives. The article below shows what that looks like in practice.

• In 2012 the US sanctioned a small Chinese bank for doing business with Iran.
• That same year China began building its own international payment system, CIPS. Today 210 banks are directly connected.
• China still needs the dollar; the big banks can't risk being shut out.
• So Iranian oil is bought through small refineries and small banks the US can't reach, paid in yuan outside the dollar system.

Bessent's threat last week therefore hits a system China has had fourteen years to build. That's why the rest of the world shrugged.

The week ahead

Monday is Labor Day in the US. The New York exchanges are closed, but index futures trade until 19:00 Swedish time, gold, silver and oil (WTI) until 20:30, then everything reopens at midnight. FX trades as usual. Expect thin volume and moves that don't say much; the real week starts on Tuesday. Check your broker's exact hours, they can differ by a quarter of an hour.

The Fed can't comment the week before a rate decision, so the numbers have to speak for themselves.

• Thursday: producer prices (PPI) and the state's first big bond buyback.
• Friday: inflation (CPI), the last reading before the Fed decides.

High inflation strengthens the dollar further and gold and silver could have a tough time short term. Calm inflation can turn the picture quickly.

Zoom out

Every sanction adds another piece to the system built to function without the dollar. You don't see it in this week's prices, you see it in the dollar's share of the world's currency reserves being the lowest in 25 years. Gold around 4,400 dollars and silver around 66 dollars are, to me, still a long-term case.