Dollar Gains on Euro Weakness and Higher T-note Yields

The dollar index (DXY00) on Monday rose by +0.17% and is just below last Friday’s 13-month high.  The dollar erased early losses on Monday and moved higher after the euro declined when ECB President Lagarde pushed back against any additional tightening of monetary policy by the ECB due to the US-Iran war.  The dollar also has carryover support from last Wednesday, when the FOMC projected higher interest rates later this year.  In addition, higher T-note yields on Monday have strengthened the dollar’s interest rate differentials and were supportive of the dollar.

The dollar initially moved lower on Monday on reduced safe-haven demand after Iran said there had been “major progress” in overnight discussions with the US over a peace deal. Also, Monday’s -2% fall in WTI crude oil prices is dovish for Fed policy and negative for the dollar.

Iran said there had been “major progress” in all-night discussions with the US over a peace deal following the interim agreement last week that led to a 60-day ceasefire extension and Iran opening the Strait of Hormuz.  Pakistan and Qatar said in a joint statement on Monday that there was “encouraging progress” in talks and that the US and Iran agreed to establish a “high-level committee” to oversee the talks, as well as working groups dealing with nuclear issues and sanctions on Iran.  There will also be a “de-confliction cell” to help ensure the cessation of military operations in Lebanon.

The swaps markets are discounting the odds at 39% for a +25 bp rate cut hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) on Monday fell by -0.42% and is just above last Friday’s 3-month low.  The euro was under pressure on Monday after dovish comments from ECB President Lagarde reduced the chances of additional ECB rate hikes, as she said she sees no need for a more forceful ECB response to the US-Iran war.  Losses in the euro are limited after the Eurozone’s June consumer confidence index rose more than expected.

The Eurozone Jun consumer confidence index rose +1.3 to -17.7, stronger than expectations of -18.0.

ECB President Christine Lagarde said the ECB doesn’t need to react more forcefully to the Middle East conflict because inflation is set to return to target over the medium term.

The markets are discounting a +10% 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 +0.17%.  The yen on Monday tumbled to a 23-month low against the dollar.  Monday’s rally in the Nikkei Stock Index to a new record high has reduced safe-haven demand for the yen.  Also, higher T-note yields on Monday were bearish for the yen.  In addition, concerns that the BOJ is falling behind the curve in normalizing monetary policy are weighing on the yen after BOJ Deputy Governor Uchida said last week the BOJ will assess the impact of rate hikes on the economy, signaling it will move at a glacial pace on policy tightening. 

Losses in the yen were limited on Monday amid some jawboning from Japanese Finance Minister Satsuki Katayama, who said Japanese authorities will take appropriate action in the currency market “whenever necessary.” With the yen firmly above 160 per dollar, intervention risks have increased, as Japanese authorities have intervened in the forex market several times in the past when the yen reached that level. 

The markets are discounting a +4% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) on Monday closed down -43.20 (-1.02%), and July COMEX silver (SIN26) closed down -0.736 (-1.11%).

Gold and silver prices fell to 1-week lows on Monday and settled sharply lower.  Monday’s dollar strength weighed on precious metals. Also, signs of progress in peace negotiations between the US and Iran are negative for safe-haven demand for precious metals, after Iran said there had been “major progress” in all-night discussions with the US.   

Precious metals found some support from Monday’s dovish comments from ECB President Lagarde, who said the ECB doesn’t need to tighten monetary policy further amid the US-Iran war, as she expects inflation to return to target over the medium term. Precious metals also have safe-haven demand amid political uncertainty in the UK following Keir Starmer’s announcement that he would step down as Britain’s prime minister.   

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 7.5-month low last Wednesday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to an 11-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.