Dollar Supported by Renewed Iran Tensions

The dollar index (DXY00) today is up +0.19%.  The dollar is receiving support today on an increase in safe-haven demand after crude oil prices gained when Iran's FARS news agency claimed that two missiles had hit a US warship after it had ignored warnings from entering the Strait of Hormuz, although the US denied the claims. Iran's military said that US forces would be attacked if they entered the Strait of Hormuz.  Also, today's better-than-expected US March factory orders report supports the dollar.  The dollar also has carryover support from last Friday when President Trump threatened to raise tariffs on European automobile imports to as high as 25%.

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.  President Trump said he was sticking with a naval blockade of Iran, and Iran's Supreme Leader, Mojtaba Khamenei, vowed not to give up Iran's nuclear or missile technologies and said Iran would keep control of the Strait of Hormuz.  

US Mar factory orders rose +1.5% m/m, stronger than expectations of +0.6% m/m and the biggest increase in four 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) today is down by -0.07%.  The euro is under pressure today from a stronger dollar. The euro also has a negative carryover from last Friday when President Trump threatened to raise tariffs on European automobile imports to as high as 25%. 

Losses in the euro are limited today after the Eurozone May Sentix investor confidence index unexpectedly rose and after ECB Governing Council member Peter Kazimir said an ECB rate hike in June is "all but inevitable."   

The Eurozone May Sentix investor confidence index unexpectedly rose by +2.8 to -16.4, stronger than expectations of a decline to -22.0.

ECB Governing Council member Peter Kazimir said an ECB rate hike in June is "all but inevitable amid a prolonged period of broad-based price increases coupled with visibly weaker growth across the Eurozone."

Swaps are discounting a 91% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) today is up by +0.04%.  The yen is under pressure today from a stronger dollar.  Also, today's increase in crude oil prices is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy needs.  In addition, higher T-note yields today are bearish for the yen. Trading activity may be below normal today, as markets in Japan are closed for Greenery Day.

The markets are discounting a +64% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) today is down -71.50 (-1.54%), and July COMEX silver (SIN26) is down -1.871 (-2.45%).

Gold and silver prices are sharply lower today due to a stronger dollar and higher global bond yields. Also, safe-haven demand for precious metals eased slightly after President Trump said the US would begin guiding some neutral ships trapped in the Persian Gulf out through the Strait of Hormuz.  In addition, hawkish comments today from ECB Governing Council member Peter Kazimir undercut precious metals prices when he said an ECB rate hike in June is "all but inevitable."

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.  On Sunday, a tanker was hit by projectiles just north of Fujairah, United Arab Emirates, and Iran's FARS news agency claimed that two missiles had hit a US warship after it had ignored warnings.  However, the US denied that a ship was hit.  Iran's military said that US forces would be attacked if they entered the Strait of Hormuz. 

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 last Friday 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.