Dollar Rises on Hawkish Rally in Oil Prices

The dollar index (DXY00) on Monday rose by +0.28% on safe-haven demand after Iran said it had halted ceasefire talks with the US, which raised the potential threat of a resumed full-scale US attack on Iran.  That report prompted a rally of more than +5% in crude oil prices, which in turn prompted a +4 bp rise in the 10-year T-note yield and supported the dollar’s interest rate differentials. 

The dollar also saw support after the May US manufacturing PMI rose +1.3 points to 54.0, stronger than expectations for a +0.3 point rise to 53.0.  However, S&P’s final-May manufacturing PMI was revised -0.2 points lower to 55.1 from the preliminary report of 55.3, versus expectations for an unrevised report.  On a positive inflation note, the May ISM prices-paid index fell by -2.5 points to 82.1 from 84.6, weaker than expectations for a +0.4 point rise to 85.0. 

The swaps markets are discounting the odds at 2% for a +25 bp rate cut hike at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) on Monday fell -0.24% due to dollar strength. Also, Monday’s sharp rally in oil prices was negative for the Eurozone economy, which is dependent on imported oil. 

On the positive side for the euro, the S&P final-May Eurozone manufacturing PMI was revised higher by +0.2 points to 51.6, which was stronger than expectations of an unrevised report. 

Also on the positive side for the euro, swaps boosted the odds to 94% from 89% for a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) on Monday rose by +0.24%.  The yen was undercut by dollar strength.  The yen was also undercut by Monday’s sharp rally in oil prices, as Japan is heavily dependent on imported oil.

The markets are discounting a +72% chance of a +25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) on Monday closed down -85.30 (-1.87%), and July COMEX silver (SIN26) closed down -0.621 (-0.82%).

Gold and silver prices fell on Monday due to the stronger dollar.  Precious metals prices were also undercut by Monday’s rise in 10-year T-note yields and hawkish shift in expectations for Fed policy after the sharp rally in oil prices.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5.5-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 9.5-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.