Dollar Rises with Crude Prices and Bond Yields

The dollar index (DXY00) rose by +0.29% on Monday.  The dollar found support Monday on some safe-haven demand from escalating hostilities in the Middle East after the US and Iran traded attacks over the weekend.  Also, Monday's stock market weakness boosted liquidity demand for the dollar.  In addition, Monday's +9% surge in crude oil prices raises inflation expectations and could prompt the Fed to tighten monetary policy, a supportive factor for the dollar.  The dollar added to its gains today after President Trump said the US is reinstating the Iranian blockade and stopping Iranian ships from using the Strait of Hormuz. 

Over the weekend, the US launched fresh missile attacks against Iran, targeting Iranian air-defense systems, coastal radar sites, and missile and drone capabilities.  Iran launched retaliatory missile and drone attacks at targets in Jordan, Bahrain, Kuwait, and Qatar.  Iran also attacked two vessels attempting to transit the Strait of Hormuz.

Hawkish comments on Monday from Fed Governor Christopher Waller gave the dollar a boost when he said, "If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term."

The swaps markets are discounting the odds at 43% for a +25 bp rate hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) fell to a 1-week low on Monday and finished down by -0.29%.  The euro was under pressure on Monday from a strong dollar.  Also, Monday's +9% surge in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy. 

The markets are discounting a +20% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.

USD/JPY (^USDJPY) rose by +0.47% on Monday.  The yen fell against the dollar on Monday after Reuters reported that Japan has no plans to overhaul the Government Pension Investment Fund's (GPIF) asset allocation.  The yen had rallied last Friday on speculation that the $1.8 trillion GPIF could shift more money into domestic assets, after Japanese Finance Minister Satsuki Katayama said the government wants pension funds to increase domestic investment.  The yen was also under pressure from Monday's +9% surge in crude oil prices, which is negative for Japan's economy and the yen, as Japan imports more than 90% of its energy. 

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 surpassed that level.

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 -108.20 (-2.63%), and September COMEX silver (SIU26) closed down -2.193 (-3.64%).

Gold and silver prices plunged on Monday to 1.5-week lows and settled sharply lower.  Precious metals retreated on Monday amid a surge in crude oil prices.  WTI crude oil surged by more than 9% on Monday to a 3.5-week high after the US and Iran exchanged military strikes over the weekend, which lifted inflation expectations and could prompt central banks worldwide to tighten monetary policy, a bearish factor for precious metals.  Also, higher global bond yields on Monday were bearish for precious metals. Hawkish comments on Monday from Fed Governor Christopher Waller knocked metal prices to their lows when he said the FOMC may have to tighten monetary policy if US core inflation remains elevated.

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