The dollar index (DXY00) finished little changed on Friday. The dollar found some support from Friday’s +4% jump in WTI crude oil prices, which raises inflation expectations and could prompt the Fed to pursue tighter monetary policy, a supportive factor for the dollar. Also, Friday’s stock selloff boosted liquidity demand for the dollar. Friday’s US economic news was mixed for the dollar, with housing starts and consumer sentiment stronger than expected, but building permits and manufacturing production below expectations. The dollar gave up its gains on Friday as T-note yields declined, which weakened the dollar’s interest rate differentials.
US Jun housing starts rose +19.0% m/m to 1.427 million, stronger than expectations of 1.310 million. However, Jun building permits, a proxy for future construction, fell -3.0% to 1.367 million, below expectations of 1.403 million.
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US Jun manufacturing production was unchanged m/m, weaker than expectations of +0.1% m/m.
The US Jun import price index ex-petroleum rose +0.5% m/m, stronger than expectations of +0.4% m/m.
The University of Michigan US Jul consumer sentiment index rose by +4.9 to a 5-month high of 54.4, stronger than expectations of 51.0.
The University of Michigan US Jul 1-year inflation expectations eased to 4.2% from 4.6% in Jun, weaker than expectations of 4.4%. The Jul 5-10-year inflation expectations were unchanged at 3.3% from Jun, right on expectations.
Hawkish comments today from Cleveland Fed President Beth Hammack were supportive of the dollar, as she said persistently high inflation is her bigger concern right now, while consumer spending holds up and unemployment remains low.
Heightened tensions between the US and Iran are pushing crude oil prices higher and could prompt the Fed to tighten monetary policy, which would be supportive of the dollar. The US launched fresh strikes against Iran for the sixth consecutive day on Friday, hitting coastal surveillance and air defense sites, military logistics infrastructure, and maritime assets. Iran responded by attacking US bases in Kuwait, Jordan, and Bahrain, with Kuwait saying a desalination and electricity plant were hit, with many power-generation units sustaining damage. The Kuwaiti armed forces said it intercepted 32 Iranian drones targeting “vital” institutions. President Trump pledges to intensify the bombardment until Iran stops attacking ships in the Strait of Hormuz and agrees to open the waterway.
The swaps markets are discounting the odds at 14% for a +25 bp rate hike at the next FOMC meeting on July 28-29.
EUR/USD (^EURUSD) fell by -0.05% on Friday. Surging crude oil prices weighed on the euro on Friday, after WTI crude rallied by more than +4% to a 5-week high, which is negative for the Eurozone economy and the euro, as Europe imports most of its energy.
The markets are discounting a +8% chance of a +25 bp rate hike by the ECB at its next policy meeting on July 23.
USD/JPY (^USDJPY) rose by +0.04% on Friday. The yen posted modest losses on Friday. Surging crude prices on Friday were the main bearish factor for the yen after WTI crude rose by more than +4% to a 5-week high, which is bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy.
Losses in the yen were limited on Friday due to lower T-note yields today. Also, a Bloomberg report that said the BOJ will raise its Japanese GDP forecast for this year at its policy meeting later this month is positive for the yen. In addition, Friday’s -4% plunge in the Nikkei Stock Index has boosted some safe-haven demand for the yen.
Bloomberg reported that the BOJ is likely to consider raising its growth forecast from the current projection of +0.5% for the year ending next March in its quarterly outlook and consider revising its assessment that risks to the economy are “skewed to the downside,” signaling confidence that the Japanese economy can avoid a serious downturn.
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 +1% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.
August COMEX gold (GCQ26) on Friday closed up +26.70 (+0.67%), and September COMEX silver (SIU26) closed up +0.139 (+0.25%).
Gold and silver prices recovered from early losses on Friday and settled higher. The dollar gave up an early advance on Friday, which sparked short covering in precious metals. Also, lower global bond yields on Friday were supportive of precious metals.
Precious metals initially moved lower on Friday, with gold posting a 2.5-week low and silver falling to a 7.75-month low. Friday’s +4% jump in crude oil prices raises inflation expectations and could prompt the world’s central banks to tighten monetary policy, a bearish factor for precious metals. Also, hawkish comments on Friday from Cleveland Fed President Beth Hammack were bearish for precious metals when she said persistently high inflation is her bigger concern right now.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.5-month low last Monday, after reaching a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to an 11.75-month low on Tuesday 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.
