Dollar Rallies on Signs of a Resilient US Economy

The dollar index (DXY00) on Thursday climbed to a 2-week high, finishing up by 0.29%.  The dollar garnered support from Thursday's as-expected US April retail sales report, signaling signs of a resilient US economy.  Also, signs of progress in US-China trade negotiations are supportive of the dollar after Reuters reported that the US and China are weighing a potential framework under which each country identifies about $30 billion in goods on which tariffs could be eased without threatening national security interests.  The dollar added to its gains on comments from Kansas City Fed President Jeff Schmid, who said the fundamentals of the US economy are sound.

US weekly initial unemployment claims rose +12,000 to 211,000, showing a slightly weaker labor market than expectations of 205,000. 

US Apr retail sales rose +0.5% m/m, right on expectations.  Also, Apr retail sales ex-autos rose +0.7% m/m, right on expectations.

The US Apr import price index ex-petroleum rose by +0.7% m/m, stronger than expectations of +0.5% m/m.

Kansas City Fed President Jeff Schmid said the fundamentals of the US economy are sound, but "inflation is the most pressing risk to the economy."

Swaps markets are discounting the odds at 4% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) slid to a 2-week low on Thursday and finished down by -0.30%.  Thursday's stronger dollar undercut the euro.  Losses in the euro are contained by hawkish comments from ECB Governing Council member Martins Kazaks, who said that if inflation expectations deteriorate due to rising energy prices, the ECB will be forced to raise interest rates.

ECB Governing Council member Martins Kazaks said, "Oil prices are higher, we see that it's gradually starting to push inflation up, and if inflation expectations start to deteriorate, then the ECB will be forced to raise interest rates."

Swaps are discounting an 80% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) on Thursday rose by +0.25%.  The yen dropped to a 2-week low against the dollar on Thursday. Safe-haven demand for the yen was reduced on Thursday after the Nikkei Stock Index posted a new all-time high. Losses in the yen were limited after hawkish comments from BOJ board member Kazuyuki Masu pushed the 10-year JGB bond yield up to a 29-year high of 2.641% on Thursday.  Also, lower T-note yields on Thursday were supportive of the yen.

BOJ board member, Kazuyuki Masu, said, "If statistical data do not indicate clear signs of an economic downturn, I believe it is desirable to raise the policy interest rate at the earliest stage possible."

The markets are discounting a +76% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) on Thursday closed down -21.40 (-0.45%), and July COMEX silver (SIN26) closed down -4.040 (-4.52%).

Gold and silver prices settled lower on Thursday, pressured by a rally in the dollar index to a 2-week high.  Also, Thursday's rally in the S&P 500 to a new record high curbed safe-haven demand for precious metals.  In addition, hawkish central bank comments on Thursday weighed on precious metals.  Kansas City Fed President Jeff Schmid said inflation is the most pressing risk to the US economy.  Also, ECB Governing Council member Martins Kazaks said the ECB will have to raise interest rates if inflation expectations deteriorate.  In addition, BOJ board member Kazuyuki Masu said the BOJ should raise interest rates as soon as possible. 

Precious metals have safe-haven support after the US and Iran failed to come to an agreement to end the war, which could lead to renewed hostilities in the Middle East.  Silver prices also have carryover support from Wednesday's rally in copper to a new record high.  Copper prices are soaring as a squeeze on Middle Eastern sulfur supplies, driven by the closure of the Strait of Hormuz, threatens the production outlook for some global copper mines, as sulfur is used in processing about a sixth of global copper. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 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 a 9-month low last Tuesday after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following last Thursday's news that bullion held in China's PBOC reserves rose by +260,000 ounces to 74.64 million troy ounces in April, the largest monthly increase in a year and the eighteenth consecutive month the PBOC has boosted its gold reserves.