Dollar Edges Up on Weak Stocks and Crude Oil Strength

The dollar index (DXY00) rose by +0.24% on Tuesday.  The dollar rose on Tuesday amid weakness in stocks, boosting liquidity demand for the currency.  Also, higher crude oil prices on Tuesday pushed up inflation expectations and could persuade the Fed to keep monetary policy tight, a supportive factor for the dollar. In addition, hawkish comments from New York Fed President John Williams were supportive of the dollar, as he said inflation remains quite high.  The dollar fell from its best level on Tuesday after the US May trade deficit widened to a 14-month high. 

The US May trade deficit widened to -$77.6 billion, the largest deficit in 14 months and a negative factor for Q2 GDP.

New York Fed President John Williams said inflation remains quite high and that he sees steady economic growth and labor market stability.

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

EUR/USD (^EURUSD) on Tuesday fell by -0.25%.  The euro moved lower on Tuesday amid a stronger dollar. Losses in the euro were limited after German May industrial production rose more than expected by the most in 8 months.  Also, Tuesday's jump in the 10-year German Bund yield to a 2-week high strengthened the euro's interest rate differentials. 

German May industrial production rose +0.9% m/m, stronger than expectations of +0.1% m/m and the largest increase in 8 months.

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) fell by -0.02% on Tuesday.  The yen moved slightly higher on Tuesday amid some positive Japanese economic news after the Japan May leading index CI rose to a 4.75-year high and May household spending fell less than expected.  Also, stronger Japanese government bond yields have strengthened the yen's interest rate differentials after the 10-year JGB yield climbed to a 29-year high of 2.861% on Tuesday. 

Gains in the yen were limited on Tuesday after Japan's May real cash earnings rose less than expected, a dovish factor for BOJ policy.  Also, comments from Japan's Growth Strategy Minister Minoru Kiuchi were supportive of the yen when he said, "There's absolutely no truth" to reports suggesting the government encouraged low interest rates as part of its fiscal expansion policy.  In addition, higher T-note yields on Tuesday were negative for the yen.

The risk of intervention in currency markets to support the yen is high, as the yen remains firmly above 160 per dollar at a 39-year low.  Japanese authorities have intervened in the forex market several times in the past when the yen reached that level. 

The Japan May leading index CI rose +0.7 to a 4.75-year high of 116.8, close to expectations of 116.9.

Japan May household spending fell -0.4% y/y, a smaller decline than expectations of -2.3% y/y.

Japan May real cash earnings rose +1.4% y/y, weaker than expectations of +1.7% 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 Tuesday closed down -10.10 (-0.24%), and September COMEX silver (SIU26) closed down -1.000 (-1.60%).

Gold and silver prices settled lower on Tuesday.  Weighing on precious metals prices on Tuesday was a stronger dollar.  Also, Tuesday's +2% jump in crude oil prices raises inflation expectations and could prompt central banks worldwide to keep their monetary policies restrictive, a bearish factor for precious metals.  In addition, hawkish comments on Tuesday from New York Fed President John Williams were negative for precious metals when he said inflation is still quite high.

Losses in precious metals were limited on Tuesday amid increased safe-haven demand amid weakness in stocks and renewed tensions in the Middle East following attacks on shipping in and around the Strait of Hormuz. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.5-month low last Friday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to an 11.5-month low on Monday 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.