Dollar Rises With T-note Yields

The dollar index (DXY00) on Wednesday rose by +0.19%.  The dollar moved higher on Wednesday as T-note yields rose after Fed Chair Warsh provided no guidance on interest rates at a meeting of central bankers in Portugal.  The dollar also found support after the euro weakened following the Eurozone June CPI report, which showed prices rose less than expected.  In addition, Wednesday’s decline in the yen to a new 39-year low is dollar-supportive. 

The dollar fell back from its best level on Wednesday after the Jun ADP employment change rose less than expected and the Jun ISM manufacturing index fell more than expected. Also, Wednesday’s decline in WTI crude oil to a 4.25-month low eases inflation expectations and may prompt the Fed to ease monetary policy, a negative factor for the dollar. 

The US Jun ADP employment change rose by +98,000, showing a weaker labor market than expectations of +120,000.

The US Jun ISM manufacturing index fell -0.7 to 53.3, weaker than expectations of 53.9.  The Jun ISM prices paid sub index fell -9.1 to a 4-month low of 73.0, weaker than expectations of 77.5.

The swaps markets are discounting the odds at 27% for a +25 bp rate hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) on Wednesday fell by -0.37%.  The euro slid on Wednesday amid a stronger dollar.  The euro also came under pressure on Wednesday after the Eurozone June CPI report showed consumer prices eased more than expected, a dovish factor for ECB policy.  The euro added to its losses on dovish comments from President Christine Lagarde, who said that risks to inflation and growth are now more broadly balanced than a few weeks ago.

Eurozone Jun CPI eased to 2.8% y/y from 3.2% y/y in May, weaker than expectations of 3.0% y/y. Jun core CPI eased to 2.4% y/y from 2.6% y/y in May, weaker than expectations of 2.5% y/y.

The Eurozone Jun S&P manufacturing PMI was revised upward by +0.1 to 51.4 from the previously reported 51.3.

The markets are discounting a +4% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.

USD/JPY (^USDJPY) on Wednesday fell by -0.01%.  The yen recovered from a 39-year low against the dollar on Wednesday and posted modest gains after the Q2 Tankan large manufacturing business conditions unexpectedly rose to an 8-year high. 

The yen initially moved lower on Wednesday after Japan’s June consumer confidence came in weaker than expected and June manufacturing activity was revised lower.  Also, concerns that the BOJ is falling behind the curve in normalizing monetary policy are weighing on the yen after recent comments from BOJ Deputy Governor Uchida, who said 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 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. 

The Japan Jun consumer confidence index rose +0.2 to 33.8, weaker than expectations of 34.1. 

The Japan Q2 Tankan large manufacturing business conditions unexpectedly rose +5 to an 8-year high of 22, stronger than expectations of a decline to 16.

The Japan Jun S&P manufacturing PMI was revised downward by -0.1 to 54.8 from the previously reported 54.9.

The markets are discounting a +3% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) on Wednesday closed up +43.90 (+1.09%), and September COMEX silver (SIU26) closed up +0.589 (+0.98%).

Gold and silver prices recovered from early losses on Wednesday and moved sharply higher.  Weaker-than-expected US economic news, which is dovish for Fed policy, boosted prices after the Jun ADP employment change rose less than expected and the Jun ISM manufacturing index fell more than expected.  Also, Wednesday’s decline in WTI crude oil to a 4.25-month low lowers inflation expectations and may prompt central banks worldwide to ease monetary policy, a bullish factor for precious metals. 

Precious metals are also finding safe-haven support amid tensions in the Middle East, as Iran insists it controls traffic through the Strait of Hormuz, a move opposed by the US, Europe, and Gulf Arab nations.  In addition, Wednesday’s weaker-than-expected Eurozone June CPI report may persuade the ECB to pursue easier monetary policy, a bullish factor for precious metals.

Precious metals initially moved lower on Wednesday amid a stronger dollar.  Also, higher T-note yields on Wednesday were negative for precious metals.  In addition, safe-haven demand for precious metals receded on Wednesday after a senior US administration official said that US negotiators held positive discussions in Qatar and progress is being made on technical talks with Iran. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9-month low on Monday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to an 11.25-month low on Tuesday 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.