Dollar Rises as Iran Tensions Escalate

The dollar index (DXY00) on Monday rose by +0.25%.  The dollar moved higher on Monday amid an increase in safe-haven demand after WTI crude oil prices surged more than +4% due to the escalation of tensions in the Middle East.  Also, Monday’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.  On Monday, the United Arab Emirates (UAE) said an Iranian drone attack caused a fire at the Fujairah oil industry zone.  Also, a cargo ship from South Korea was attacked in the Strait of Hormuz, and the UAE also issued a missile threat warning after an oil tanker was struck by Iranian drones outside the Strait of Hormuz.  The US Central Command said the US military fought off attacks from Iranian drones, missiles, and armed small boats as it facilitated the passage of two US-flagged vessels through 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.

Comments on Monday from New York Fed President John Williams were dovish and negative for the dollar when he said, “Inflation is higher this year than previously expected, so that pushes off a date of lowering interest rates, but it doesn’t change the basic story that rates will need to come down at some point if inflation returns to the Fed’s 2% target.

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) on Monday fell by -0.16%.  The euro came under pressure on Monday from a stronger dollar.  Also, Monday’s +4% surge in crude oil prices is negative for the Eurozone economy and the euro as Europe imports most of its energy needs.  In addition, the euro has some 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 were limited Monday 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 99% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) on Monday rose by +0.03%.  The yen fell slightly on Monday from a stronger dollar.  Also, Monday’s +4% surge 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 on Monday were 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) on Monday closed down -111.20 (-2.39%), and July COMEX silver (SIN26) closed down -2.909 (-3.81%).

Gold and silver prices plummeted on Monday, with gold prices falling to a 1-month low.  The stronger dollar and higher global bond yields on Monday sent precious metals prices tumbling.  Also, surging crude prices on Monday lifted inflation expectations and may prompt the world’s central banks to maintain tighter monetary policies, a bearish factor for precious metals.  In addition, hawkish comments on Monday 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.  The US Central Command said the US military fought off attacks from Iranian drones, missiles, and armed small boats on Monday as it facilitated the passage of two US-flagged vessels through 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.