Dollar Slips as Lower Crude Prices Ease Rate-Hike Concerns

The dollar index (DXY00) on Friday fell by -0.07%.  The dollar moved lower on Friday amid weakness in crude oil prices.  WTI crude oil fell more than 3% on Friday to a 4-month low, easing inflation expectations and potentially persuading the Fed to ease monetary policy, a negative factor for the dollar.  The dollar fell to its low on Friday after the University of Michigan's US Jun consumer sentiment index came in weaker than expected. 

The dollar recovered from its worst level on Friday amid hawkish comments from Minneapolis Fed President Neel Kashkari, who said he's "concerned about inflation" and favors an interest rate increase this year. 

US May wholesale inventories rose +0.3% m/m, weaker than expectations of +0.4% m/m.  May retail inventories rose +0.6% m/m, stronger than expectations of +0.5% m/m.

The University of Michigan US Jun consumer sentiment index was revised upward by 0.6 to 49.5, below expectations of 50.0.

The University of Michigan US Jun 1-year inflation expectations were left unrevised at 4.6%, and the Jun 5-10 year inflation expectations were revised downward by -0.1 to 3.3% from 3.4%, right on expectations.

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) on Friday rose by +0.12%.  The weaker dollar on Friday supported gains in the euro. Also, Friday's -3% plunge in crude oil prices is bullish for the Eurozone economy and the euro as Europe imports most of its energy.  Friday's ECB inflation expectations report was mixed for the euro, with shorter-term expectations falling but longer-term expectations remaining steady.

The ECB's May 1-year CPI expectations eased to 3.5% from 4.0% in April, below the 3.9% forecast. The May 3-year CPI expectations were unchanged from April at 2.9%, higher than expectations of 2.8%.

The markets are discounting a +7% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.

USD/JPY (^USDJPY) on Friday fell by -0.04%.  The yen moved higher after Friday's June Tokyo CPI report showed prices rose more than expected, a hawkish factor for BOJ policy. Also, Friday's -3% fall in crude oil prices is supportive for the Japanese economy and the yen as Japan imports more than 90% of its energy.  In addition, Friday's -4% decline in the Nikkei Stock Index boosted safe-haven demand for the yen. 

The yen remains under pressure, trading just above Thursday's 39-year low against the dollar, 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 Jun Tokyo CPI rose +1.7% y/y, stronger than expectations of +1.6% y/y.  The Jun Tokyo CPI ex-fresh food and energy rose +1.9% y/y, stronger than expectations of +1.8% y/y.

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 Friday closed up +48.70 (+1.20%), and July COMEX silver (SIN26) closed up +0.863 (+1.48%).

Gold and silver prices settled sharply higher on Friday, supported by a weaker dollar.  Also, Friday's -3% plunge in crude oil prices pushes inflation expectations lower and could prompt the world's central banks to pursue easier monetary policies, a bullish factor for precious metals.  In addition, Friday's stock market weakness spurred some safe-haven demand for precious metals.  Prices fell back from their best levels on Friday after Minneapolis Fed President Neel Kashkari said he favors an interest rate increase this year, a negative factor for precious metals.

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 on Thursday 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.