Dollar Recovers on Conflicting US-Iran Peace Plans

The dollar index (DXY00) on Wednesday rose by +0.03%.  The dollar recovered from early losses on Wednesday and posted modest gains on conflicting signals about prospects for a US-Iran deal to end the war and reopen the Strait of Hormuz.  Iranian television said it obtained an unofficial draft of the US-Iran memorandum, which stated that US military forces would lift the naval blockade of Iran, while Iran would allow restored commercial shipping through the Strait of Hormuz.  However, the dollar rebounded when US officials said the unofficial draft obtained by Iranian state television is a "complete fabrication" and "not true."  The dollar also garnered support after the May Richmond Fed manufacturing survey of current conditions rose more than expected to a 4.5-year high

The dollar initially moved lower on Wednesday after WTI crude oil plunged by more than 5% to a 5-week low, which lowered inflation expectations and may prompt the Fed to ease monetary policy, a negative factor for the dollar.  Also, Wednesday's rally in the Chinese yuan to a 3.25-year high weighed on the dollar.

The US May Richmond Fed manufacturing survey of current conditions rose +10 to a 4.5-year high of 13.  stronger than expectations of 4.

Swaps markets are discounting the odds at 4% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) fell from a 1-week high on Wednesday and finished down by -0.01%.  Wednesday's rebound in the dollar from early losses to higher on the day sparked long liquidation in the euro.  The euro was also under pressure after German economic advisers cut their 2026 GDP forecast for Germany.

The euro initially moved higher on Wednesday amid hawkish ECB comments after ECB Governing Council member Yannis Stournaras said, "The likeliest outcome is an ECB interest rate hike in June." Also, Wednesday's -5% plunge in crude oil prices to a 5-week low was supportive of the Eurozone economy and the euro, as Europe imports most of its energy.

Eurozone Apr new car registrations rose +5.1% y/y to 972,000 units.

ECB Governing Council member Yannis Stournaras said, "The likeliest outcome is an ECB interest rate hike in June" as the conflict in the Middle East and subsequent rise in energy prices are proving to be more prolonged.

German economic advisers to Chancellor Merz cut their 2026 German GDP forecast to 0.5% from a November estimate of 0.9%.

Swaps are discounting a 92% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) on Wednesday rose by +0.14%.  The yen slid to a 3.5-week low against the dollar on Wednesday after Japan's April PPI service prices rose less than expected, a dovish factor for BOJ policy.  However, losses in the yen were limited amid lower T-note yields and the -5% plunge in crude oil prices to a 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.

Japan Apr PPI services prices eased to +3.0% y/y from +3.3% y/y in Mar, weaker than expectations of +3.3% y/y.

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 Wednesday closed down -53.90 (-1.20%), and July COMEX silver (SIN26) closed down -1.711 (-2.23%).

Gold and silver prices sold off sharply on Wednesday, with gold falling to a 1.75-month low.  Wednesday's stronger dollar weighed on metals prices. Also, Wednesday's hawkish central bank comments weighed on precious metals after ECB Governing Council member Yannis Stournaras said, "The likeliest outcome is an ECB interest rate hike in June." Silver prices were also pressured on Wednesday amid concerns about industrial metals demand, after German economic advisers to Chancellor Merz cut their 2026 German GDP forecast. 

Wednesday's -5% plunge in crude oil prices lowers inflation expectations and may prompt the world's central banks to pursue easier monetary policies, a bullish factor for metals.  In addition, lower global bond yields on Wednesday were bullish 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.