Dollar Pressured by Deal to End the US-Iran War

The dollar index (DXY00) slid to a 1-week low on Monday and finished down by -0.09%.  The dollar came under pressure on Monday after stocks rallied sharply following the US and Iran's announcement of a deal to end the war, which curbed liquidity demand for the dollar.  Also, Monday's decline in the 10-year T-note yield to a 1-month low weakened the dollar's interest rate differentials.  In addition, Monday's -4% plunge in WTI crude oil to a 3-month low was bearish for the dollar, as it lowered inflation expectations and could prompt the Fed to pursue easier monetary policy.   The dollar added to its losses on Monday's weaker-than-expected US economic reports, which included the Jun Empire manufacturing survey of general business conditions, May manufacturing production, and the Jun NAHB housing market index.

The dollar retreated on Monday after the US and Iran agreed to end their war and reopen the Strait of Hormuz.  President Trump said the Strait of Hormuz will reopen after Friday's signing of the peace deal, which will trigger the start of 60 days of talks on Iran's nuclear program. 

The US Jun Empire manufacturing survey of general business conditions fell -13.9 to 5.7, weaker than expectations of 13.7.

US May manufacturing production was unchanged m/m, weaker than expectations of +0.3% m/m.

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

EUR/USD (^EURUSD) climbed to a 1-week high on Monday, finishing up by +0.22%.  Monday's slump in the dollar is positive for the euro.  Also, Monday's -4% plunge in crude prices is bullish for the Eurozone economy and the euro, as Europe imports most of its energy.  In addition, hawkish comments today from ECB Governing Council member Martins Kazaks were bullish for the euro, as he said the ECB is ready to take further action to prevent the rise in energy prices from spreading to the rest of the economy.

Eurozone Apr industrial production rose +0.1% m/m, right on expectations.

ECB Governing Council member Martins Kazaks said, "The ECB raised the inflation forecast quite significantly, but the risks in my view are still on the upside for inflation," so the ECB is ready to take further action to stop the rise in energy prices from spreading to the rest of the economy.

The markets are discounting a +18% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.

USD/JPY (^USDJPY) on Monday rose by +0.04%.  The yen gave up an early advance on Monday and posted modest losses after the rally in the Nikkei Stock Index to a new all-time high reduced safe-haven demand for the yen.   The yen initially moved higher on Monday after the US and Iran announced a peace deal, which hammered crude oil prices and is supportive for Japan's economy, which is heavily dependent on imported oil and gas.  Monday's fall in T-note yields was also bullish for the yen.  In addition, the yen has support from expectations that the BOJ will raise interest rates at Tuesday's policy meeting. 

The Japan Apr tertiary industry index rose +1.3% m/m, stronger than expectations of +0.6% m/m.

The markets are discounting a +99% chance of a +25 bp BOJ rate hike at Tuesday's policy meeting.

August COMEX gold (GCQ26) on Monday closed up +112.80 (+2.66%), and July COMEX silver (SIN26) closed up +2.206 (+3.25%).

Gold and silver prices rallied sharply on Monday, posting 1-week highs.  Monday's decline in the dollar index to a 1-week low was supportive of metals prices.  Also, lower global bond yields on Monday were positive for precious metals.  In addition, Monday's -4% plunge in crude oil prices has lowered inflation expectations, which could prompt the world's central banks to pursue easier monetary policies, a bullish factor for precious metals. 

Bearish factors for precious metals on Monday include sharply higher global equity markets, following Iran and the US agreeing to a peace deal, which reduces safe-haven demand for precious metals.  Also, expectations of the BOJ raising interest rates at Tuesday's policy meeting are bearish for precious metals. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 6.5-month low last Friday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 10.5-month low last Friday from the 3.5-year high posted 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 +320,000 ounces to 74.96 million troy ounces in May, the largest monthly increase in 17 months, and the nineteenth consecutive month the PBOC boosted its gold reserves.