Dollar Slips as President Trump Cancels a Planned Attack on Iran

The dollar index (DXY00) fell from a 1.25-month high on Monday and finished down by -0.25%.  The dollar gave up overnight gains on Monday and turned lower following reports that the US proposed a temporary waiver of sanctions on Iran's oil.  Also, comments on Monday afternoon from President Trump weighed on the dollar when he said he called off a planned strike on Iran for Tuesday after Gulf allies appealed for more time for diplomacy to work.  The dollar recovered from its worst level after stock prices retreated, which boosted liquidity demand for the dollar.

The dollar initially moved higher on Monday on increased safe-haven demand after President Trump said the "clock is ticking" on Iran and it "better get moving FAST on a peace deal, or there won't be anything left of them." Also, ramped-up geopolitical tensions boosted safe-haven demand for the dollar after Reuters reported that Pakistan has deployed 8,000 troops, a squadron of fighter jets, and an air defense system to Saudi Arabia as part of a mutual defense pact, a deployment described as a "substantial, combat-capable force" to support Saudi Arabia if it comes under further attack.

The US May NAHB housing market index rose +3 to 37, stronger than expectations of no change at 34.

Swaps markets are discounting the odds at 0% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) rebounded from a 1.25-month low on Monday and finished up +0.22%.  Short covering emerged in the euro on Monday after the dollar gave up an overnight advance and turned lower.  Gains in the euro were limited after crude oil prices surged more than +3% to a 3-week high, which is negative for the Eurozone economy and the euro, as Europe imports most of its energy needs. 

Swaps are discounting an 88% 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 +0.09%.  The yen fell to a 2-week low against the dollar on Monday after Japanese Prime Minister Sanae Takaichi said she has called on the finance ministry to compile a yen-negative supplementary budget to address rising commodity prices driven by the ongoing conflict in the Middle East. Also, Monday's rally in crude oil prices to a 3-week high is bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy.  In addition, higher T-note yields on Monday were negative for the yen.  

Losses in the yen were limited amid higher Japanese government bond yields, which have strengthened the yen's interest rate differentials, after the 10-year JGB yield rose to a 29-year high of 2.807% on Monday.

The markets are discounting a +75% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) on Monday closed down -3.90 (-0.09%), and July COMEX silver (SIN26) closed down -0.103 (-0.13%).

Gold and silver prices settled lower on Monday, with gold falling to a 7-week low and silver sliding to a 1.5-week low.  Monday's surge in crude oil prices to a 3-week high boosted global bond yields and weighed on gold and silver prices.  Higher crude prices boost inflation expectations and may prompt central banks worldwide to pursue tighter monetary policies, a bearish factor for precious metals. Silver prices also came under pressure on Monday amid weaker-than-expected Chinese economic news, which is negative for Chinese industrial metals demand. 

Precious metals losses were limited on Monday amid a weaker dollar.  Also, harsh rhetoric from President Trump suggests the US is close to ramping up hostilities against Iram, which is boosting safe-haven demand for precious metals when he said the "clock is ticking" on Iran and it "better get moving FAST on a peace deal, or there won't be anything left of them." 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5.25-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 9.25-month low on May 5 after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following the most recent 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.

Weaker-than-expected Chinese economic news is negative for industrial metals demand and silver prices. China Apr industrial production rose +4.1% y/y, weaker than expectations of +6.0% y/y.  Also, China Apr retail sales rose +0.2% y/y, weaker than expectations of +2.0% y/y.  In addition, China Apr new home prices fell -0.19% y/y, the thirty-fifth consecutive month that prices have declined.