Dollar Gains on US Economic Strength

The dollar index (DXY00) rose by +0.06% on Monday.  The dollar found support from Monday's US economic news, which showed that new capital goods nondefense, ex-aircraft and parts orders rose more than expected, a sign of economic strength.  Some safe-haven demand also supports the dollar as President Trump has raised the possibility of intensified action against Iran and as Houthi militants in Yemen claimed to have struck facilities linked to Saudi Aramco in the Red Sea port towns of Jizan and Yanbu on Saturday.   

Gains in the dollar were limited on Monday, as an easing of tensions in the Middle East has curbed safe-haven demand for the currency after the US and Iran held off on attacks for a third straight day.  Also, Monday's -7% plunge in WTI crude oil has lowered inflation expectations and could prompt the Fed to pursue easier monetary policy, a negative factor for the dollar.  In addition, lower T-note yields on Monday weakened the dollar's interest rate differentials. 

US Jun capital goods new orders, nondefense ex-aircraft and parts rose +0.9% m/m, stronger than expectations of +0.7% m/m.

The markets are discounting a 34% probability of a +25 bp rate hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) fell slightly by -0.02% on Monday.  The dollar's rebound on Monday weighed on the euro.  However, losses in the euro were limited after the German Jul IFO business confidence index rose more than expected to a 5-month high.  Also, Monday's -7% fall in crude oil prices is supportive of the Eurozone economy and the euro as Europe imports most of its energy.  In addition, hawkish comments on Monday from ECB Governing Council member Peter Kazimir were bullish for the euro when he said he favors another ECB interest rate increase.

The German Jul IFO business confidence index rose +0.9 to a 5-month high of 86.6, stronger than expectations of 86.0.

ECB Governing Council member Peter Kazimir said "he remains of the view that the ECB will have to raise interest rates at least one more time" to ensure that inflation risks don't spin out of control.

The markets are discounting an 88% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) fell by -0.05% on Monday.  The yen recovered further from last Thursday's 39-year low of 163.99 yen/USD on Monday, amid lower T-note yields.  Also, Monday's -7% plunge in crude oil prices is supportive for the Japanese economy and the yen as Japan imports more than 90% of its energy.  In addition, the yen has support from the ongoing risk of intervention by Japanese authorities 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. 

However, Monday's Japanese economic news was bearish for the yen after the May leading index CI was revised downward by -0.3 to 116.5 from the originally reported 116.8.  Also, Japan Jun PPI services prices eased to 3.2% y/y from 3.4% y/y in May, weaker than expectations of no change at 3.4% y/y.

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 Friday. 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 Monday closed up +6.20 (+0.15%), and September COMEX silver (SIU26) closed down -0.194 (-0.33%).

Gold and silver prices settled mixed on Monday.  The -7% plunge in crude oil prices on Monday lowered inflation expectations and could prompt central banks worldwide to ease monetary policy, a bullish factor for precious metals.  Also, precious metals prices continue to receive safe-haven support from US-Iran hostilities along with concerns of a widening conflict in the Middle East after Houthi rebels attacked Saudi Arabian ships in the Red Sea over the weekend.

Strength in the dollar on Monday was negative for metals prices.  Also, some safe-haven demand for precious metals was curbed after the US held off on further airstrikes against Iran for a third straight day on Monday, and Iran signaled it would refrain from any retaliation as it held negotiations with Oman over the Strait of Hormuz.  On Sunday, Mike Waltz, US ambassador to the United Nations, said the US is giving diplomacy "some space."

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 10-month low last Monday, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 1-year low on July 14 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.