Dollar Weakens as Crude Oil Prices Tumble

The dollar index (DXY00) on Thursday fell by -0.10%.  The announcement of a ceasefire between Israel and Lebanon knocked WTI crude oil prices down by more than -3% on Thursday and lowered inflation expectations, which might persuade the Fed to ease monetary policy, a negative factor for the dollar.  Also, Thursday's US economic news, showing a bigger-than-expected increase in weekly jobless claims and a larger-than-expected downward revision to Q1 nonfarm productivity, is bearish for the dollar. 

US weekly initial unemployment claims rose +13,000 to a 3.75-month high of 225,000, showing a weaker labor market than expectations of 215,000.

US Q1 nonfarm productivity was revised downward to 0.3% from the previously reported 0.8%, weaker than expectations of 0.4%.  Q1 unit labor costs were unexpectedly revised downward to 1.8% from 2.3%, weaker than expectations of an upward revision to 2.4%.

Late Wednesday, the US said Israel and Lebanon agreed to a ceasefire if Hezbollah also stops fighting and withdraws its militants from areas near the border with Israel.  The agreement would require the Lebanese army to take over after the withdrawal of Israeli troops.  Iran insists a deal with the US requires a ceasefire in Lebanon.  However, Hezbollah militants on Thursday said they refused to abide by the conditions of the ceasefire announced by the US State Department, and clashes continued in southern Lebanon.

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 Thursday rose by +0.14%.  Thursday's weaker dollar was supportive of the euro. Also, Thursday's -3% plunge in crude oil prices is bullish for the Eurozone economy and the euro, as Europe imports most of its energy.  Thursday's weaker-than-expected report on Eurozone Apr retail sales was negative for the euro.

Eurozone Apr retail sales fell -0.4% m/m, weaker than expectations of -0.3% m/m.

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) on Thursday fell by -0.03%.  The yen moved slightly higher on Thursday amid weakness in the dollar.  Also, Thursday's -3% plunge in crude oil prices benefits Japan's economy and the yen, as Japan imports most of its energy.  In addition, Thursday's Bloomberg report that the BOJ is leaning toward raising interest rates at this month's policy meeting was bullish for the yen. Finally, lower T-note yields on Thursday were supportive of the yen.

Bloomberg reported that the BOJ is set to consider a 25 bp interest rate increase at its June meeting and sees the possibility of a further rate hike later this year.  The BOJ is also set to unveil its latest bond-buying plans at its June meeting and is currently paring back its purchases by 200 billion yen ($1.3 billion) per quarter through March next year.

The markets are discounting a +95% chance of a +25 bp BOJ rate hike at the next policy meeting on June 16.

August COMEX gold (GCQ26) on Thursday closed up +38.10 (+0.85%), and July COMEX silver (SIN26) closed up +0.277 (+0.38%).

Gold and silver prices settled higher on Thursday amid a weaker dollar.  Also, Thursday's -3% decline in crude oil prices has lowered inflation expectations and may prompt the world's central banks to loosen monetary policy, a bullish factor for precious metals.  In addition, lower global bond yields on Thursday were supportive of precious metals prices.  Finally, concerns that the US-Iran war will persist boosted some safe-haven demand for precious metals after Hezbollah militants said they refused to abide by the conditions of the ceasefire announced by the US State Department between Israel and Lebanon.

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 9.75-month low on Wednesday 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.