Dollar Supported by Middle East Uncertainty

The dollar index (DXY00) rallied to a 6-week high on Thursday and finished up by +0.13%.  Doubts over a US-Iran peace deal that would reopen the Strait of Hormuz boosted safe-haven demand for the dollar today after Reuters reported that Iran's Supreme Leader said enriched uranium must stay in Iran.  The dollar added to its gains on Thursday after the US May manufacturing PMI expanded at its strongest pace in four years.  In addition, hawkish comments from Chicago Fed President Austan Goolsbee boosted the dollar when he said he was worried about inflation.

The dollar fell back from its best level on Thursday after reports that the US and Iran were close to a peace deal sent WTI crude oil prices sharply lower after initially rallying early on Thursday.  Lower crude prices weaken inflation expectations and could prompt the Fed to loosen monetary policy, a bearish factor for the dollar.  In addition, Thursday's stock rebound curbed liquidity demand for the dollar. 

Thursday's US economic news is mixed for the dollar after manufacturing and housing activity were better than expected, but the May Philadelphia Fed business outlook survey fell more than expected to a 5-month low.

US weekly initial unemployment claims fell -3,000 to 209,000, close to expectations of 210,000.

US Apr housing starts fell -2.8% m/m to 1.465 million, a smaller decline than expectations of 1.410 million.  Apr building permits, a proxy for future construction, rose +5.8% m/m to 1.442 million, stronger than expectations of 1.384 million.

The US May Philadelphia Fed business outlook survey fell -27.1 to a 5-month low of -0.4, weaker than expectations of 17.8.

The US May S&P manufacturing PMI unexpectedly rose +0.8 to 55.3, stronger than expectations of a decline to 53.8 and the strongest pace of expansion in 4 years.

Chicago Fed President Austan Goolsbee said the employment side of the Fed's dual mandate is "mostly stable," but "right now we have a pretty significant inflation problem developing."

Swaps markets are discounting the odds at 1% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) fell to a 6-week low on Thursday and finished down by -0.04%.  The dollar's strength on Thursday weighed on the euro.  Also, Thursday's economic news showing that the Eurozone's May manufacturing and composite PMIs fell more than expected is bearish for the euro. 

However, the euro recovered most of its losses on Thursday after crude oil prices erased an early rally and fell sharply, which is positive for the Eurozone economy and the euro, as Europe imports most of its energy needs.  The euro also found support after the Eurozone's May consumer confidence index rose more than expected.

The Eurozone May S&P manufacturing PMI fell -0.8 to 51.4, weaker than expectations of 51.8. The Eurozone May S&P composite PMI fell -1.3 to 47.5, weaker than expectations of no change at 48.8 and the steepest pace of contraction in 2.5 years.

The Eurozone May consumer confidence index rose +1.6 to -19.0, stronger than expectations of no change at -20.6.

The European Commission forecast 2026 Eurozone GDP to weaken to +0.9% from +1.4% in 2025, and 2026 Eurozone CPI to strengthen to +3.0% from +2.1% in 2025.

Swaps are discounting an 87% 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 +0.04%.  The yen slid to a 3-week low today against the dollar.  Thursday's Japanese economic news, which showed declines in the May S&P manufacturing and services PMIs and a plunge in Mar core machine orders, was negative for the yen. 

However, losses in the yen were limited on stronger-than-expected Japanese trade data for April.  Also, hawkish comments from BOJ Board member Junko Koeda were supportive of the yen, as he said the BOJ should keep hiking interest rates at an appropriate pace amid rising inflation.  In addition, the sharp reversal in crude oil prices on Thursday from sharply higher to sharply lower was supportive for Japan's economy and the yen, as Japan imports more than 90% of its energy.  Finally, the closer the yen falls to 160 per dollar, the greater the likelihood that Japanese authorities will intervene in forex markets to prop up the yen, as they have done several times recently when the yen fell below that level.

Japanese trade data was better than expected.  Apr exports rose +14.8% y/y, stronger than expectations of +9.2% y/y.  Also, Apr imports rose +9.7% y/y, stronger than expectations of +8.5% y/y.

The Japan May S&P manufacturing PMI fell -0.6 to 54.5.  The May S&P services PMI fell -1.0 to 50.0.

Japan Mar core machine orders fell -9.4% m/m, weaker than expectations of -8.4% m/m and the biggest decline in 4 years.

BOJ Board member Junko Koeda said, "I see some possibility that underlying inflation may exceed 2% looking ahead, so I therefore believe it is reasonable for the BOJ to raise the policy interest rate at an appropriate pace to address high inflation while also considering the trade-offs for the economy."

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) on Thursday closed up +7.20 (+0.16%), and July COMEX silver (SIN26) closed up +0.551 (+0.72%).

Gold and silver prices recovered from early losses on Thursday and settled higher.   The sharp reversal in crude oil prices on Thursday, from sharply higher to sharply lower, sparked short covering in precious metals.  The retreat in 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.  Also, doubts over a US-Iran peace plan that would reopen the Strait of Hormuz boosted some safe-haven demand for precious metals after Reuters reported that Iran's Supreme Leader said enriched uranium must stay in Iran.

Precious metals initially moved lower on Thursday after crude oil prices surged more than +3%, a hawkish factor for central bank policies and bearish for metals.  Also, hawkish central bank comments were bearish for precious metals, following Chicago Fed President Austan Goolsbee's warning about inflation and BOJ Board member Junko Koeda's call for continued rate hikes at an appropriate pace.

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.