Dollar Falls as the Yen Rallies on Intervention Talk

The dollar index (DXY00) today fell to a 1-week low and is down by -0.67%.  Today’s +2% rally in the yen is weighing on the dollar after Japanese Finance Minister Satsuki Katayama warned that Japan is close to intervening in the forex market to support the yen.  Also, lower crude oil prices today have eased inflation expectations, a dovish factor for Fed policy, and a negative factor for the dollar.  The dollar extended its losses today after US Q1 GDP grew at a slower-than-expected pace and Mar leading indicators fell by the most in eleven months. 

The dollar found some support today after US weekly jobless claims fell to a 57-year low, the Q1 employment cost index rose more than expected, and the US Mar core PCE price index, the Fed’s preferred inflation gauge, rose 3.2% y/y, the largest increase in 2.25 years.

Heightened US-Iran tensions are boosting demand for the dollar as a safe-haven.  The US and Iran are locked in a battle for control of the Strait of Hormuz, with both sides blocking the waterway to gain leverage during an extended ceasefire.  Axios reported that President Trump will be briefed on new military options for action in Iran, signaling the potential for fresh escalation in the war.  US Central Command has prepared a plan for a “short and powerful” wave of strikes on Iran, likely infrastructure targets. 

US weekly initial unemployment claims fell -26,000 to a 57-year low of 189,000, showing a stronger labor market than expectations of 212,000.  Weekly continuing claims fell -23,000 to a 2-year low of 1.785 million, showing a stronger labor market than expectations of 1.815 million.

US Mar personal spending rose +0.9% m/m, right on expectations.  Mar personal income rose +0.6% m/m, stronger than expectations of +0.3% m/m.

The US Mar core PCE price index, the Fed’s preferred inflation gauge, rose +0.3% m/m and +3.2% y/y, right on expectations, with the +3.2% y/y gain the largest increase in 2.25 years.

The US Q1 employment cost index rose +0.9%, stronger than expectations of +0.8%

US Q1 GDP rose +2.0% (q/q annualized), weaker than expectations of +2.3%.  The Q1 core PCE price index rose +4.3%, stronger than expectations of +4.1% and the largest increase in 3 years.

The US Apr MNI Chicago PMI unexpectedly fell -3.6 to a 4-month low of 49.2, weaker than expectations of an increase to 54.9.

US Mar leading indicators fell -0.6% m/m, weaker than expectations of -0.2% m/m and the biggest decline in 11 months.

Swaps markets are discounting the odds at 3% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) recovered from a 2-week low today and is up by +0.30%.  The euro is finding support today from a weaker dollar.  Also, Eurozone Apr CPI rose at the fastest pace in 2.5 years, and the Eurozone Mar unemployment rate matched a record low, hawkish factors for ECB policy.  Gains in the euro are limited after the Eurozone Q1 GDP grew at a weaker-than-expected pace and after German March retail sales fell by the most in nearly 3.5 years.

Eurozone Apr CPI rose +3.0% y/y, right on expectations and the strongest pace of increase in 2.5 years. Apr core CPI rose +2.2% y/y, right on expectations.

The Eurozone Mar unemployment rate fell -0.1 and matched a record low of 6.2%, right on expectations.

Eurozone Q1 GDP rose +0.1% q/q and +0.8% y/y, weaker than expectations of +0.2% m/m and +0.9% y/y.

German Mar retail sales fell -2.0% m/m, weaker than expectations of -0.2% m/m and the biggest decline in nearly 3.5 years.

The German Apr unemployment change rose by +20,000, showing a weaker labor market than expectations of 4,300.  The Apr unemployment rate was unchanged at 6.4%, showing a weaker labor market than expectations of 6.3%

The ECB, as expected, kept the deposit facility rate unchanged at 2.00% and said, “The upside risks to inflation and the downside risks to growth have intensified.”

ECB President Christine Lagarde said, “The economic growth outlook is highly uncertain and will depend on how long the war in the Middle East will last, how strongly it affects energy and other commodity markets, as well as global supply chains.” She added, “Incoming information suggests the conflict is weighing on economic activity, surveys point to slowing growth, and consumers and businesses have become less confident about the future.”

Swaps are discounting a 90% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) today is down sharply by -2.33%.  The yen recovered from a 1.75-year low today and rallied to a 2-month high as short covering emerged after Japanese Finance Minister Satsuki Katayama warned that “the time was near” for Japan to intervene in the currency market to support the yen.  Also, today’s 1% fall in crude oil prices is positive for the Japanese economy and the yen, as Japan imports more than 90% of its energy needs.

The yen initially weakened today after crude oil prices surged to a 3-week high in overnight trade. Also, the larger-than-expected decline in Japan’s Apr consumer confidence index to a 1-year low, along with the unexpected decline in Mar industrial production, were bearish for the yen.

The Japan Apr consumer confidence index fell -1.1 to a 1-year low of 32.2, weaker than expectations of 32.8.

Japan Mar industrial production unexpectedly fell -0.5% m/m, weaker than expectations of a +1.1% m/m increase.

Japan Mar retail sales rose +1.3% m/m, stronger than expectations of +0.6% m/m.

Japanese Finance Minister Satsuki Katayama said the time “for taking bold steps is now nearing” after the yen fell to a 1.75-year low, suggesting Japanese officials are close to intervening in the currency market to support the yen.

The markets are discounting a +65% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) today is up +71.50 (+1.57%), and May COMEX silver (SIK26) is up +1.771 (+2.47%).

Gold and silver prices are moving sharply higher today as the dollar index dropped to a 1-week low.  Also, today’s -1% fall in crude oil prices lowers inflation expectations and may prompt the world’s central banks to pursue easier monetary policies, a bullish factor for precious metals.  In addition, lower global bond yields today are supportive of precious metals. 

Heightened Middle East tensions are positive for safe-haven demand of precious metals as both the US and Iran are maintaining blockades of the Strait of Hormuz.  Axios reported that President Trump will be briefed on new military options for action in Iran, signaling the potential for fresh escalation in the war.  US Central Command has prepared a plan for a “short and powerful” wave of strikes on Iran, likely infrastructure targets. 

Precious metals also remain supported by uncertainty over US tariffs, US political turmoil, large US deficits, and government policy uncertainty, which are boosting demand for precious metals as a store of value.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 4.5-month low on March 31 after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to an 8.5-month low on Wednesday after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following the recent news that bullion held in China’s PBOC reserves rose by +160,000 ounces to 74.38 million troy ounces in March, the seventeenth consecutive month the PBOC has boosted its gold reserves.