Dollar Retreats on Iran Optimism

The dollar index (DXY00) fell from a 6-week high on Wednesday and finished down by -0.24%.  The dollar gave up an early advance on Wednesday and moved lower after comments from President Trump that the US was in the “final stages” with Iran, which knocked crude oil prices down by more than -5%, which lowered inflation expectations and could prompt the Fed to ease monetary policy, a negative for the dollar.  Also, Wednesday’s stock rally reduced liquidity demand for the dollar.

The minutes of the April 28-29 FOMC meeting were hawkish and supportive of the dollar as “many” policymakers called for the Fed to drop its easing bias and signal its next move could be an interest rate increase.  Also, most of the meeting’s participants said that “some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.”

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 on Wednesday and finished up by +0.23%.  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 sank more than -5%, 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 82% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) on Wednesday fell by -0.15%.  The yen moved higher on Wednesday amid lower T-note yields. Also, Wednesday’s -5% plunge 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 Wednesday’s comments 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 +78% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) on Wednesday closed up +24.10 (+0.53%), and July COMEX silver (SIN26) closed up +1.022 (+1.36%).

Gold and silver prices settled higher on Wednesday, with gold rebounding from a 7-week low.  Precious metals moved higher on Wednesday amid a weaker dollar.  Also, comments from President Trump that the US is in the ”final stages” with Iran sent crude oil prices plunging more than -5%, which lowered inflation expectations and could persuade the world’s central banks to pursue easier monetary policies, a bullish factor for precious metals. 

Wednesday’s strength in stocks has curbed some safe-haven demand for precious metals.  Also, the hawkish minutes of the April 28-29 FOMC meeting were negative for precious metals.  In addition, hawkish comments from ECB Governing Council member Pierre Wunsch were bearish for precious metals when he said it’s likely that the ECB will raise interest rates at its June meeting if the Iran war isn’t resolved by then.

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.