Dollar Erases Early Gains as Crude Prices Fall and Stocks Rally

The dollar index (DXY00) fell from a 6-week high today and is down by -0.09%.  The dollar gave up an early advance today and moved lower after crude oil prices fell by more than -2%, which lowered inflation expectations and could prompt the Fed to ease monetary policy, a negative for the dollar.   Also, today's stock rally has reduced liquidity demand for the dollar.  The dollar initially moved higher today on an increase in safe-haven demand after President Trump threatened to resume strikes on Iran in the coming days as part of the push for a deal to end the war. 

Swaps markets are discounting the odds at 7% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) recovered from a 6-week low today and is up +0.12%.  Short covering emerged in the euro today after the dollar gave up an early advance and turned lower.  The euro also rose today after crude oil prices fell more than -2%, which is bullish for the Eurozone economy and the euro, as Europe imports most of its energy needs.

ECB Governing Council member Pierre Wunsch said, "If the Iran conflict isn't resolved by June, then I think the likelihood of an ECB rate hike is quite high."

Swaps are discounting an 83% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) today is down by -0.09%.  The yen is slightly higher today amid lower T-note yields. Also, today's -2% fall in crude oil prices benefits Japan's economy and the yen, as Japan imports more than 90% of its energy.  In addition, the yen found support on comments today from Japanese Finance Minister Satsuki Katayama, who indicated her resolve to intervene in the foreign exchange market to support the yen.  The closer the yen falls to 160 per dollar, the greater the likelihood of Japanese authorities intervening in forex markets to prop up the yen, as they have done several times recently when the yen fell below that level.

Japanese Finance Minister Satsuki Katayama said, "We have understanding" from our G-7 counterparts, that "we will take bold action as needed" to prop up the yen.

The markets are discounting a +81% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) is down -15.30 (-0.34%), and July COMEX silver (SIN26) is up +0.696 (+0.93%).

Gold and silver prices are mixed today, with gold falling to a 7-week low.  Gold prices are under pressure today from a rally in the dollar index to a 6-week high.  Also, today's strength in stocks has curbed some safe-haven demand for precious metals. In addition, gold prices fell on hawkish comments from ECB Governing Council member Pierre Wunsch, who said it's likely that the ECB will raise interest rates at its June meeting if the Iran war isn't resolved by then.

Gold losses are limited, and silver prices are rising today after the UK April consumer prices rose less than expected, a dovish factor for BOE policy and a bullish factor for precious metals.  Also, today's -2% fall in WTI crude oil prices lowers inflation expectations and could prompt the world's central banks to pursue easier monetary policies, a bullish factor for precious metals.  In addition, a lack of progress in ending the Iran war and reopening the Strait of Hormuz has boosted safe-haven demand for precious metals. 

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.