Dollar Soars and Gold Plunges as Global Bond Yields Climb

The dollar index (DXY00) rallied to a 2.5-week high today and is up by +0.39%.  The dollar is climbing today on concerns that strong US economic news and soaring crude oil prices will prompt the Fed to tighten monetary policy, a bullish factor for the dollar.  Today's economic news was bullish for the dollar after the May Empire manufacturing survey general business conditions unexpectedly rose to a 4-year high, and Apr manufacturing production posted its biggest increase in 14 months.  Also, the 10-year T-note yield rose to an 11.75-month high of 4.58% today, strengthening the dollar's interest rate differentials. Finally, slumping equity markets today are boosting liquidity demand for the dollar.

The US May Empire manufacturing survey of general business conditions unexpectedly rose +8.6 to a 4-year high of 19.6, stronger than expectations of a decline to 7.2.

US Apr manufacturing production rose +0.6% m/m, stronger than expectations of +0.2% m/m and the largest increase in 14 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) tumbled to a 5-week low today and is down by -0.33%.  Today's stronger dollar is pressuring the euro.  Also, today's +3% jump in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy needs.  Losses in the euro are limited after the 10-year German Bund yield soared to a 15-year high today, strengthening the euro's interest-rate differentials.

Swaps are discounting an 89% 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 +0.20%.  The yen has moved lower every day this week, falling to a 2-week low against the dollar today.  The strength of the dollar is pressuring the yen.  Also, today's +3% jump 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, soaring T-note yields today are bearish for the yen. 

Losses in the yen are limited after Japan's April produce prices surge pushed the 10-year JGB bond yield to a nearly 29-year high of 2.736% today, strengthening the yen's interest rate differentials.  Also, the largest increase in Japanese machine tool orders last month in 4.25 years is hawkish for BOJ policy and supportive for the yen.

Japan Apr PPI rose +2.3% m/m and +4.9% y/y, stronger than expectations of +0.8% m/m and +3.0% y/y, with the 4.9% y/y jump the largest annual increase in almost three years.

Japan Apr machine tool orders rose +45.1% y/y, the largest increase in 4.25 years.

The markets are discounting a +79% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) today is down -124.20 (-2.65%), and July COMEX silver (SIN26) is down -8.073 (-9.46%).

Gold and silver prices are plummeting today, with gold falling to a 1.5-week low and silver sliding to a 1-week low.  Today's rally in the dollar index to a 2.5-week high is weighing on metals prices.  Also, today's surge in global bond yields is bearish for precious metals prices.  In addition, today's +3% rally in WTI crude oil raises inflation expectations and may prompt the world's central banks to pursue tighter monetary policies, a negative factor for precious metals.  In addition, India, the world's second biggest bullion consumer, more than doubled tariffs on gold and silver imports this week, which will curb its demand for the metals.

Precious metals have safe-haven support as peace talks between the US and Iran remain in limbo, 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.