Dollar Slips on Weak US Housing News and Lower Crude Prices

The dollar index (DXY00) on Tuesday fell by -0.12%.  Tuesday’s weaker-than-expected US May housing starts and building permits reports undercut the dollar.  Also, Tuesday’s -5% fall in WTI crude oil to a 3.5-month low was bearish for the dollar, as it lowers inflation expectations and could prompt the Fed to pursue easier monetary policy.  The dollar has some negative carryover from Monday when the US and Iran announced a deal to end the war, which curbed safe-haven demand for the dollar.

The dollar’s focus will turn to the 2-day FOMC meeting that began on Tuesday and will be the first under the leadership of new Fed Chair Kevin Warsh.  While the Fed is expected to keep interest rates unchanged, the spotlight will be on how Mr. Warsh navigates the post-meeting press conference and the outlook for inflation.

US May housing starts fell -15.4% m/m to a 6-year low of 1.177 million, weaker than expectations of 1.430 million.  May building permits, a proxy for future construction, fell -0.7% m/m to 1.413 million, weaker than expectations of 1.418 million.

The US May import price index ex-petroleum rose +0.8% m/m, stronger than expectations of +0.5% m/m.

The swaps markets are discounting the odds at 5% for a +25 bp rate cut hike at the conclusion of the Tue/Wed FOMC meeting.

EUR/USD (^EURUSD) rose by +0.18% on Tuesday but remained below Monday’s 1-week high.  The euro has support from Tuesday’s news showing the German Jun ZEW survey expectations of economic growth rose more than expected to a 4-month high.  Also, Tuesday’s -5% plunge in crude prices is bullish for the Eurozone economy and the euro, as Europe imports most of its energy.  Gains in the euro were limited after the 10-year German bund yield fell to an 8-week low of 2.92% on Tuesday, which weakened the euro’s interest rate differentials.   

Eurozone Q1 labor costs were revised downward to +3.2% y/y from the previously reported +3.4% y/y.

The German Jun ZEW survey expectations of economic growth rose +20.7 to a 4-month high of 10.5, stronger than expectations of -5.5.

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 Tuesday rose by +0.04%.  The yen fell slightly on Tuesday after the Nikkei Stock Index rallied to a new all-time high, which reduced safe-haven demand for the yen. The yen was also pressured after the BOJ signaled it was stopping its tapering of bond purchases, a bearish factor for the yen.

Losses in the yen were limited after the BOJ raised interest rates by 25 bp, as expected.  The yen also found support from the post-meeting BOJ statement, which said it will keep raising rates in response to the economy and prices.  Tuesday’s -5% fall in crude oil prices to a 3.5-month low is also supportive for the yen and Japan’s economy, which is heavily dependent on imported oil and gas.  Lower T-note yields on Tuesday were bullish for the yen. 

The BOJ voted 7-1 to raise the overnight call rate by 25 bp to 1.00% and said it will keep raising interest rates in response to the economy and prices.  The BOJ also said it would keep its bond buying steady at a monthly pace of around 2 trillion yen ($12.5 billion) from April 2027.

BOJ Deputy Governor Shinichi Uchida, filling in for the ailing BOJ Governor Kazuo Ueda, said in his post-meeting statement that “regarding the question of falling behind the curve, our basic approach is to continue raising policy interest rates while adjusting the degree of monetary easing.”

The markets are discounting a +1% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) on Tuesday closed up +2.80 (+0.06%), and July COMEX silver (SIN26) closed down -0.167 (-0.24%).

Gold and silver prices gave up sharp gains on Tuesday and settled mixed.  Precious metals were supported on Tuesday by lower global bond yields.  Also, Tuesday’s -5% 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 Tuesday included carryover from Monday, following Iran and the US agreeing to a peace deal, which reduces safe-haven demand for the metals.  Also, Tuesday’s BOJ rate hike of 25 bp was bearish for precious metals.  Silver prices also fell on the weaker-than-expected US May housing starts and building permits reports, bearish factors for industrial metals demand.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 7.25-month low on Monday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 10.5-month low on Monday 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.