Dollar Little Changed as Oil Prices Fall Back

The dollar index (DXY00) on Friday ended the day little changed.  The dollar index was undercut as oil prices fell back by about -3%.  Also, the 10-year T-note yield fell -1.8 bp after posting a new 1.5-year high earlier in the session.  The dollar continued to have safe-haven support as the market is braced for a possible expansion of US military attacks on Iran, which President Trump said he is considering.

The dollar has safe-haven demand after the Iran-backed Houthis on Thursday launched a missile and drone attack on two Saudi Arabian oil tankers in the Red Sea, expanding the oil disruptions beyond the Strait of Hormuz and threatening oil shipments in the Red Sea.  President Trump responded by saying he will hold Iran responsible for the Houthi attacks and telling Axios in an interview on Thursday that he is considering a "massive attack" that would be "bigger than ever before" and is "close to making a decision on it."

The Houthis have vowed to blockade shipping linked to Saudi Arabia and warned shipowners against calling at the nation's ports.  The move threatens Saudi oil exports from Yanbu, a Red Sea hub that the Saudi's are using to ship crude since the war brought shipping through the Strait of Hormuz to a near halt.  Meanwhile, the US and Iran exchanged attacks for the 13th straight day, and the US maintained its blockade of Iranian oil shipments in the Persian Gulf. 

Friday’s US PMI report was mixed for the dollar.  The S&P July manufacturing PMI fell slightly by -0.1 point to 53.8, weaker than expectations for a +0.5 point increase to 54.4.  However, the S&P July services PMI rose by +2.4 points to 53.6, which was stronger than expectations for a +0.3 point increase to 51.5.

US June new home sales rose by +1.6% m/m to 628,000 from a revised May level of 618,000 (preliminary 580,000), which was stronger than expectations of 607,000.  However, June building permits fell -2.6% to 1.374 million.

The markets are discounting a 38% probability of a +25 bp rate hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) on Friday fell -0.08%, adding to Thursday's loss of -0.33%.  Yet the euro has some support after the 10-year German bund yield on Thursday edged to a new 15-year high, illustrating the impact of rising oil prices and inflation fears.

The ECB at its policy meeting on Thursday left its key deposit rate unchanged at 2.25%, in line with market expectations.  The ECB said it left rates unchanged, awaiting further data to determine whether additional rate hikes are necessary to address the inflation outlook.  However, ECB President Christine Lagarde said, "Risks to the inflation outlook are to the upside." The markets are discounting a 91% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) was little changed.  The yen consolidated slightly above Thursday's 39-year low of 163.99 yen/USD, amid ongoing risk of intervention to support the yen.  Japanese authorities have intervened in the forex market several times in the past when the yen surpassed 160 yen/USD, as it has this week. 

The yen continues to suffer from weak interest rate differentials, with markets discounting only a 4% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31. The BOJ's current policy rate of 1.00% is well below the Fed's federal funds rate target of 3.50%-3.75%.

August COMEX gold (GCQ26) on Friday’ closed up +20.60 (+0.51%), and September COMEX silver (SIU26) closed up +0.852 (+1.47%).

Gold and silver prices rebounded higher on Friday after gold fell -2.45% on Thursday and silver fell -3.72%. Gold saw support on on the stable dollar and mildly lower T-note yields.  Precious metals prices have continued to receive safe-haven support from US-Iran hostilities as President Trump says he is considering a broader military attack on Iran.

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.