Dollar Weakens on US-Iran Peace Hopes

The dollar index (DXY00) on Tuesday fell by -0.07%.  The dollar moved lower on Tuesday amid signs that peace negotiations between the US and Iran are progressing, which curbed safe-haven demand for the dollar.  Also, Tuesday's rally in the S&P 500 to a new record high has dampened liquidity demand for the dollar.  In addition, Tuesday's -2% fall in crude oil prices lowers inflation expectations and may prompt the Fed to ease monetary policy, a negative factor for the dollar. The dollar recovered from its worst level after the US May consumer confidence index fell less than expected.

The US Apr Chicago Fed National Activity Index rose +0.29 to a 13-month high of 0.14, stronger than expectations of -0.03.

The US Mar S&P Composite-20 home price index rose +0.83% y/y, a smaller increase than expectations of +0.90% y/y and the smallest year-on-year gain in more than 2.5 years.

The Conference Board US May consumer confidence index fell -0.7 to 93.1, a smaller decline than the 92.0 expected. 

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) on Tuesday fell by -0.13%.  The moved lower on Tuesday amid comments from ECB Executive Board member Isabel Schnabel, who said the negative impact on economic growth in the Eurozone due to the energy shock from the Iran war will be stronger than initially feared.  Losses in the euro were limited after ECB Chief Economist Philip Lane said the ECB will probably raise its quarterly inflation outlook at next month's policy meeting.  Also, ECB Executive Board member Isabel Schnabel said the ECB should hike interest rates in June. 

ECB Executive Board member Isabel Schnabel said even if there's a quick resolution to the conflict in the Middle East, "I think a rate hike by the ECB in June will be needed."  She added that "given the high persistence of the energy shock, I believe that the negative impact on economic growth will also be stronger" than initially expected. 

ECB Chief Economist Philip Lane said the ECB will likely raise its quarterly inflation outlook at next month's policy meeting, as the Iran war keeps energy prices elevated.

Swaps are discounting a 91% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) on Tuesday rose by +0.26%.  The yen fell to a 3-week low against the dollar on Tuesday after the Japan Mar leading index CI was revised lower.  However, losses in the yen were limited amid lower T-note yields and the -2% fall in crude oil prices to a 2.5-week low, which benefits the Japanese economy and the yen as Japan imports more than 90% of its energy. Also, 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.

The Japan Mar leading index CI was revised downward by -0.5 to 114.0 from the previously reported 114.5.

The markets are discounting a +73% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) on Monday closed down -20.90 (-0.46%), and July COMEX silver (SIN26) closed up +0.407 (+0.53%).

Gold and silver prices settled mixed on Tuesday.  Dollar weakness on Tuesday and lower T-note yields were supportive of precious metals prices.  Also, Tuesday's -2% fall in crude oil prices lowered inflation expectations and may prompt the world's central banks to pursue easier monetary policies, a bullish factor for metals. 

Gold prices shed early gains on Tuesday and turned lower after hawkish central bank comments.  ECB Executive Board member Isabel Schnabel said she favors raising interest rates at next month's policy meeting.  Also, ECB Chief Economist Philip Lane said the ECB will probably raise its quarterly inflation outlook at next month's policy meeting, a hawkish factor for ECB policy.  In addition, Tuesday's rally in the S&P 500 to a new record high dampened 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 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.