Dollar Retreats as Stocks Rally

The dollar index (DXY00) on Monday fell by -0.26%.  The dollar retreated as Monday's stock rally curbed liquidity demand for the dollar.  However, losses in the dollar were limited as Monday's +2% jump in WTI crude oil prices has strengthened inflation expectations and could prompt the Fed to keep monetary policy tight, a supportive factor for the dollar.   

The swaps markets are discounting the odds at 32% for a +25 bp rate hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) on Monday rose by +0.33%.  The euro moved higher on Monday, supported by a weaker dollar. The euro also found support after Monday's report on Eurozone Jun economic confidence rose more than expected. Gains in the euro were limited after Eurozone May M3 money supply rose more than expected, a negative development for the euro.

The Eurozone Jun economic confidence indicator rose by +1.3 to 95.0, beating expectations of 94.3.

Eurozone May M3 money supply rose +3.2% y/y, stronger than expectations of +2.7% y/y.

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 Monday rose by +0.14%.  The yen tumbled to a 39-year low against the dollar on Monday after reports that the Japanese government is expected to call for "appropriate" monetary management in its basic policy guidelines, in an attempt to persuade the BOJ to avoid further monetary policy tightening.  Losses in the yen were limited amid signs of strength in the Japanese economy after Monday's report showed that Japan's May retail sales unexpectedly increased. 

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 last 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 at a 39-year low, intervention risks have increased, as Japanese authorities have intervened in the forex market several times in the past when the yen reached that level. 

Japan May retail sales unexpectedly rose +1.9% m/m, stronger than expectations of a -0.5% m/m decline.

The Japanese government is expected to call for "appropriate" monetary management in its Basic Policy on Economic and Fiscal Management and Reform scheduled for release in July, according to a document seen by Bloomberg, in an apparent attempt to dissuade the BOJ from further interest rate increases.

The markets are discounting a +2% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) on Monday closed down -57.40 (-1.40%), and July COMEX silver (SIN26) closed down -1.049 (-1.77%).

Gold and silver prices settled sharply lower on Monday amid strength in crude oil prices.  WTI crude rose by more than +2% on Monday, raising inflation expectations and potentially prompting the world's central banks to tighten monetary policy, a bearish factor for precious metals.  Also, Monday's stock strength reduced safe-haven demand for precious metals.  Monday's weaker dollar limited losses in precious metals.   

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9-month low last Friday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to an 11-month low last 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.