The dollar index (DXY00) fell to a 3.5-week low on Wednesday and finished down by -0.46% today. The dollar retreated on Wednesday with T-note yields after US June producer prices rose less than expected, a dovish factor for Fed policy. Also, the benign CPI report has reduced the chances of a Fed rate hike at the FOMC meeting later this month to 10% from 43% on Monday, further weighing on the dollar.
Losses in the dollar were limited amid escalating hostilities in the Middle East that are boosting crude oil prices after US forces launched airstrikes against Iran today for a fifth day. The higher crude prices raise inflation expectations and could prompt the Fed to tighten monetary policy, a supportive factor for the dollar. Also, the Jul Empire manufacturing survey general business conditions report rose more than expected, a positive factor for the dollar.
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US Jun PPI final demand eased to +5.5% y/y from +6.0% y/y, weaker than expectations of +6.2% y/y. Jun PPI ex food and energy rose +4.7% y/y, weaker than expectations of +5.1% y/y.
The US Jul Empire manufacturing survey of general business conditions rose +9.9 to 15.6, stronger than expectations of 9.2.
New York Fed President John Williams said, “Inflation is unquestionably too high, but there are encouraging reasons to expect that inflation has peaked and should edge down in coming quarters.”
The Fed Beige Book was mixed for the dollar as it stated that economic activity in the 12 Fed regions increased at a slight to moderate pace in the 6 weeks to July 6, unchanged from June’s summary. Most regions reported little to no change in employment and, “consumer prices continued to rise, with several districts reporting their contacts saw greater price sensitivity among their customers.”
The US launched more airstrikes on Iran on Wednesday, the fifth straight day of attacks, and President Trump pledged to intensify the bombardment until Iran stops attacking ships in the Strait of Hormuz and agrees to open the waterway. Iran responded with missile and drone attacks against Kuwait.
The swaps markets are discounting the odds at 10% for a +25 bp rate hike at the next FOMC meeting on July 28-29.
EUR/USD (^EURUSD) rallied to a 3.5-week high on Wednesday and finished up by +0.47%. Wednesday’s dollar weakness lifted the euro after US Jun PPI rose less than expected. The euro also received support on Wednesday from higher European bond yields, which have strengthened the euro’s interest rate differentials, after the 10-year German Bund yield rose to a 1.75-month high of 3.148%. Gains in the euro were limited after Eurozone May industrial production unexpectedly declined.
Eurozone May industrial production unexpectedly fell -0.2% m/m, weaker than expectations of a+0.2% m/m increase.
ECB Governing Council member and Bundesbank President Joachim Nagel said, “The development of energy prices is a decisive factor in determining the future inflation outlook, and monetary policy will maintain its vigilant stance.”
The markets are discounting a +6% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.
USD/JPY (^USDJPY) fell by -0.12% on Wednesday. The yen found support from Wednesday’s weaker-than-expected US Jun PPI report, which weighed on the dollar and T-note yields. The yen also has carryover support from Tuesday when Japanese Finance Minister Satsuki Katayama said there are discussions within the ruling party to add government bonds to a tax-free investment program for individuals, which would boost demand for the yen. Wednesday’s Japanese economic news was mixed for the yen.
The Japan May tertiary industry index rose +1.1% m/m, stronger than expectations of +0.4% m/m.
Japan May core machine orders fell -12.4% m/m, weaker than expectations of -4.2% m/m and the largest decline in almost 6.5 years.
The risk of intervention in currency markets to support the yen is high, as the yen remains firmly above 160 per dollar at a 39-year low. Japanese authorities have intervened in the forex market several times in the past when the yen surpassed that level.
The markets are discounting a +2% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.
August COMEX gold (GCQ26) on Wednesday closed down -17.90 (-0.44%), and September COMEX silver (SIU26) closed down -1.671 (-2.83%).
Gold and silver prices settled lower on Wednesday, with silver falling to a 2.5-week low. Higher crude oil prices on Wednesday boosted inflation expectations and could potentially persuade global central banks to tighten monetary policy, a negative for precious metals. Silver prices also tumbled on Wednesday amid signs of slower growth in China’s economy, which is negative for industrial metals demand, after China’s Q2 GDP rose +4.3% y/y, weaker than expectations of +4.4% y/y and the slowest pace of expansion in 3.5 years.
Gold losses were limited on Wednesday after the weaker-than-expected US Jun PPI report pushed the dollar and T-note yields lower, a supportive factor for precious metals. Also, the benign CPI report reduced the chance for a Fed rate hike at the FOMC meeting later this month to 10% from 43% on Monday, a supportive factor for precious metals.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.5-month low today, after reaching a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to an 11.75-month low today from the 3.5-year high posted on December 23.
Strong central bank demand for gold is supportive of gold prices, following news that bullion held in China’s PBOC reserves rose by +480,000 ounces to 75.44 million troy ounces in June, the twentieth consecutive month the PBOC boosted its gold reserves.
