Dollar Weakens on Strength in Stocks and Lower Bond Yields

The dollar index (DXY00) today is down by -0.19%.  The dollar is under pressure as today's stock rally has reduced liquidity demand for the dollar.  Also, benign inflation news today may keep the Fed from tightening monetary policy, a negative for the dollar, after the May core PCE price index, the Fed's preferred inflation gauge, rose as expected. 

Losses in the dollar are limited, as today's US economic news shows the economy is strengthening.  Q1 GDP was revised upward, weekly jobless claims fell more than expected, and May personal spending and income, and May capital goods new orders rose more than expected. 

US weekly initial unemployment claims fell -12,000 to 215,000, showing a stronger labor market than expectations of 225,000.

US May personal spending rise +0.7% m/m, stronger than expectations of +0.6% m/m.  May personal income rose +0.7% m/m, stronger than expectations of +0.4% m/m and the biggest increase in 10 months.

The US May core PCE price index, the Fed's preferred inflation gauge, rose +3.4% y/y, right on expectations and the fastest pace of increase in 2.5 years.

US May capital goods new orders nondefense ex-aircraft and parts, a proxy for capital spending, rose +1.6% m/m, stronger than expectations of +0.6% m/m.

US Q1 GDP was revised upward to +2.1% (q/q annualized), stronger than expectations of no change at +1.6%.

The swaps markets are discounting the odds at 30% for a +25 bp rate cut hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) is up by +0.10% today.  The euro recovered from early losses and moved higher today as the dollar weakened.  Also, today's decline in crude oil prices to a 4-month low is supportive for the Eurozone economy and the euro, as Europe imports most of its energy.

The euro initially moved today after the German July GfK consumer confidence index rose less than expected.  The euro is also under pressure amid negative carryover from Monday, after ECB President Lagarde's dovish comments reduced the chances of additional ECB rate hikes, when she said she sees no need for a more forceful ECB response to the US-Iran war. 

The German July GfK consumer confidence index rose by +0.5 to -29.2, weaker than expectations of -28.0.

The markets are discounting a +5% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.

USD/JPY (^USDJPY) today is down by -0.02%.  The yen recovered from early losses today and is slightly higher after the Japan Apr leading index CI was revised upward to a 4.75-year high.  Also, hawkish comments today from BOJ Board member Tamura were supportive of the yen when he said the BOJ should raise interest rates every few months until monetary policy is normalized.  In addition, lower T-note yields today are bullish for the yen. 

The yen today initially moved lower and matched a 39-year low first posted in July of 2024.  Today's sharp +4% surge in the Nikkei Stock Index reduced safe-haven demand for the yen.  The yen remains under pressure amid concerns that the BOJ is falling behind the curve in normalizing monetary policy.  Last week, BOJ Deputy Governor Uchida said that the BOJ will assess the impact of rate hikes on the economy, signaling it will move at a glacial pace on policy tightening. 

The risk of intervention in currency markets to support the yen is rising after Japanese Finance Minister Satsuki Katayama said she spoke with US Treasury Secretary Scott Bessent on Tuesday, and they agreed to take "bold" steps on currencies if needed, and that the nations are increasingly "aligned" on foreign-exchange policy.  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 Japan Apr leading index CI was revised upward by +0.2 to a 4.75-year high of 116.1 from the previously reported 115.9.

BOJ Board member Naoki Tamura said, "What I envisage as a baseline path is raising the main interest rate by a quarter percentage point at intervals of a few months toward the neutral interest rate level of 2%."

The markets are discounting a +0% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) today is up +25.90 (+0.65%), and July COMEX silver (SIN26) is down -0.312 (-0.54%).

Gold and silver prices are mixed today, as they consolidate this week's sharp losses.  Today's weaker dollar is supportive of metals.  Also, lower global bond yields are bullish for precious metals.  In addition, today's fall in WTI crude oil to a 4-month low has eased inflation expectations and could prompt global central banks to ease monetary policy, a bullish factor for precious metals.  Finally, precious metals have safe-haven demand amid political uncertainty in the UK following Keir Starmer's announcement on Monday that he would step down as Britain's prime minister.   

Today's rally in stocks has reduced some safe-haven demand for precious metals.  Also, hawkish comments today from BOJ Board member Naoki Tamura were bearish for precious metals when he said the BOJ should raise interest rates every few months until monetary policy is normalized. 

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.