Strength in US Economic Reports Boosts the Dollar

The dollar index (DXY00) today is up by +0.23%.  The dollar is moving higher today and is being supported by a +1% increase in WTI crude oil prices, which lifts inflation expectations and may prompt the Fed to tighten monetary policy, a bullish factor for the dollar.  Gains in the dollar accelerated today on stronger-than-expected US economic reports on May ADP employment, May ISM services index, and Apr factory orders, hawkish factors for Fed policy. In addition, escalation of Middle East tensions is boosting some safe-haven demand for the dollar after US forces intercepted Iranian ballistic missiles and drones aimed at neighboring countries and struck an Iranian command center in response. 

The US May ADP employment change rose 122,000, slightly stronger than expectations of 120,000 and the biggest increase in 16 months.

The US May ISM services index rose +0.9 to 54.5, stronger than expectations of 53.8.

US Apr factory orders rose +4.8% m/m, stronger than expectations of +4.6% m/m and the largest increase in 11 months.

The swaps markets are discounting the odds at 3% for a +25 bp rate cut hike at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) today is down by -0.25%.  The euro is under pressure today from a stronger dollar. Also, today's +1% jump in crude oil to a 1.5-week high is bearish for the Eurozone economy and the euro, as Europe imports most of its energy.

Today's Eurozone economic news was supportive of the euro after Eurozone April producer prices posted their fastest pace of increase in more than three years, and the Eurozone May S&P composite PMI was revised upward.

Eurozone Apr PPI rose +4.9% y/y, right on expectations and the fastest pace of increase in more than 3 years.

The Eurozone May S&P composite PMI was revised upward by +1.0 to 48.5 from the previously reported 47.5.

The markets are discounting a +97% chance for a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) today is up by +0.04%.  The yen fell to a 1-month low against the dollar today after crude oil prices rose more than +1% to a 1.5-week high, which is bearish for the Japanese economy and the yen as Japan imports most of its energy.  Also, higher T-note yields today are bearish for the yen.  Losses in the yen are limited amid hawkish comments from BOJ Governor Kazuo Ueda, which have boosted the chances of a BOJ interest rate increase later this month.  

BOJ Governor Kazuo Ueda said that should the economy evolve in line with the BOJ's forecasts, which see the Mideast turmoil calming and inflation reaching its 2% target, "I think the bank will continue to raise the policy rate at an appropriate pace."

The markets are discounting a +88% chance of a +25 bp BOJ rate hike at the next policy meeting on June 16.

August COMEX gold (GCQ26) today is down -41.10 (-0.91%), and July COMEX silver (SIN26) is down -1.621 (-2.15%).

Gold and silver prices are falling today amid a stronger dollar.  Also, today's +2% jump in crude oil prices raises inflation expectations and may force the world's central banks to tighten their monetary policies, a bearish factor for precious metals.  Higher global bond yields today are also weighing on precious metals prices. Hawkish comments from BOJ Governor Kazuo Ueda boosted the chances of a BOJ rate hike later this month and also undercut precious metals when he said the risks of higher inflation call for higher interest rates.  Precious metals added to their losses today on stronger-than-expected US economic reports on May ADP employment change, May ISM services index, and Apr factory orders, which are hawkish for Fed policy. 

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.