Dollar Slightly Lower as the Yen Recovers

The dollar index (DXY00) is down by -0.10% today.  The dollar is under modest pressure today amid a recovery in the yen, which rose from a 39-year low on the prospect of faster interest rate hikes from the BOJ.  Losses in the dollar are limited due to today's +3% rally in WTI crude oil to a 6-week high, which raises inflation expectations that could prompt the Fed to tighten monetary policy, a supportive factor for the dollar.  Also, higher T-note yields today have strengthened the dollar's interest rate differentials and are supportive of the dollar.

The US and Iran played down the prospect of peace talks as disruptions to global oil supplies continue to mount.  The US conducted an 11th straight day of attacks on Iran in an effort to degrade the country's ability to threaten commercial shipping in the Strait of Hormuz. Iran retaliated by striking US bases in Bahrain, Kuwait, and Jordan.  President Trump said on Tuesday that the US has "no interest" in meeting with Iran until they are ready for serious peace negotiations.

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

EUR/USD (^EURUSD) is up by +0.14% today.  The euro is climbing today amid weakness in the dollar. Also, higher European government bond yields have strengthened the euro's interest rate differentials and are supportive for the euro after the 10-year German Bund yield climbed to a 2-month high of 3.192% today.  In addition, short-covering and position squaring are supportive for the euro ahead of the results of Thursday's ECB meeting, where the ECB is expected to keep interest rates unchanged. 

Gains in the euro are limited due to today's +3% jump in crude oil prices to a 6-week high, which is negative for the Eurozone economy and the euro, as Europe imports most of its energy. 

The markets are discounting a +5% chance of a +25 bp rate hike by the ECB at its next policy meeting on Thursday.

USD/JPY (^USDJPY) is down by -0.07% today.  The yen recovered slightly today from Tuesday's 39-year low against the dollar on better-than-expected Japanese trade news. Short covering also emerged in the yen on the prospects for faster BOJ interest rate hikes, after a Bloomberg report today said BOJ officials are open to raising rates faster than the consensus due to the yen's continued weakness and upside inflation risks. 

Gains in the yen are limited amid strength in crude oil prices.  WTI crude is up more than +3% today at a 6-week high, which is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy. Also, higher T-note yields today are weighing on the yen. 

Better-than-expected Japanese trade news is supportive of the yen after Japan's Jun exports rose 19.3% y/y, stronger than the +18.0% y/y expected and the largest increase in 3.5 years. Also, Jun imports rose +25.4% y/y, stronger than expectations of +21.2% y/y and the largest increase in 3.5 years.

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 +1% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) today is up +83.20 (+2.04%), and September COMEX silver (SIU26) is up +1.772 (+3.00%).

Gold and silver prices are sharply higher today, rising to 2-week highs.  Precious metals are supported today by a weaker dollar.  Also, today's weakness in stocks has boosted safe-haven demand for precious metals, as has the escalation of hostilities between the US and Iran, as both countries exchanged strikes for an eleventh consecutive day. In addition, concerns that the conflict could widen are supporting precious metals after Houthi rebels said they will impose a maritime blockade on Saudi Arabia in retaliation for what they say is the kingdom's siege on the Yemeni capital. 

Higher global bond yields today are bearish for precious metals.  Also, today's +3% surge in crude oil prices to a 6-week high raises inflation expectations and could prompt the world's central banks to tighten monetary policy, a bearish factor for precious metals.  In addition, today's Bloomberg report said BOJ officials are open to raising interest rates faster than the consensus, a negative for precious metals.  

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.75-month low on Monday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 1-year low last 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 +480,000 ounces to 75.44 million troy ounces in June, the twentieth consecutive month the PBOC boosted its gold reserves.