Dollar Falls as T-Note Yields Drop

The dollar index (DXY00) on Wednesday fell by -0.436 (-0.41%).  The dollar Wednesday fell back from a new 19-year high and posted moderate losses.  A decline in T-note yields Wednesday undercut the dollar.  Also, weaker than expected U.S. economic data Wednesday on May retail sales and the Jun Empire manufacturing survey were bearish for the dollar. 

The dollar whipsawed lower after the FOMC raised the target range on the fed funds rate by 75 bp, but Fed Chair Powell downplayed expectations for more aggressive rate hikes when he said the next policy move by the FOMC at its July meeting will be a 50 bp or 75 bp rate hike.

The FOMC voted 10-1 to raise the fed funds target range by 75 bp to 1.50%-1.75% and projected the funds rate to rise to 3.4% by year-end, implying another 175 bp of tightening this year. 

The FOMC said it "anticipates that ongoing increases in the fed funds target range will be appropriate, and the committee is strongly committed to returning inflation to its 2% objective."

The FOMC cut its U.S. 2022 GDP estimate to 1.7% from a March projection of 2.8% and raised its 2022 personal consumption expenditures price index to 5.2% from a March estimate of 4.3%.

U.S. May retail sales unexpectedly fell -0.3% m/m, weaker than expectations of +0.1% m/m.  May retail sales ex-autos rose +0.5% m/m, weaker than expectations of +0.7% m/m.

The U.S. Jun Empire manufacturing survey general business conditions rose +10.4 to -1.2, weaker than expectations of 2.3.

The U.S. May import price index ex-petroleum unexpectedly fell -0.1% m/m, weaker than expectations of +0.6% m/m and the first decline in 19 months.

The U.S. Jun NAHB housing market index fell -2 to a 2-year low of 67, right on expectations.

EUR/USD (^EURUSD) on Wednesday rose by +0.0033 (+0.32%).  The euro Wednesday recovered from a 1-month low and posted moderate gains as dollar weakness spurred short-covering in the euro. EUR/USD Wednesday initially moved lower when the ECB announced after an emergency meeting that it is studying the reinvestment of bond purchases conducted under the now-halted pandemic purchase program.  Weaker than expected Eurozone industrial production data for May was also bearish for EUR/USD. 

The ECB announced an emergency meeting Wednesday "to discuss current market conditions" and whether to use the reinvestment of bond purchases conducted under the now-halted pandemic emergency purchase program (PEPP) to slow soaring bond yields.

ECB Executive Board member Schnabel said the ECB won't tolerate "changes in financing conditions that go beyond fundamental factors and that threaten monetary-policy transmission."

Eurozone May industrial production rose +0.4% m/m, weaker than expectations of +0.5% m/m.

USD/JPY (^USDJPY) Wednesday fell -1.70 (-1.25%).  USD/JPY retreated Wednesday from a new 23-year high as the yen strengthened on higher Japanese government bond yields after the 10-year JGB bond yield climbed to a 6-1/2 year high Wednesday at 0.308%.  Gains in the yen accelerated Wednesday after T-note yields fell.  The yen Wednesday initially dropped to a fresh 23-year low against the dollar after the BOJ boosted QE and announced unlimited purchases of cheapest-to-deliver 10-year bonds for Thursday and Friday.  The BOJ is attempting to keep the 10-year JGB bond yield from climbing above the upper end of its 0.25% target range. 

Wednesday’s Japanese economic data was mixed for the yen.  On the positive side, Japan Apr core machine orders unexpectedly rose +10.8% m/m, stronger than expectations of -1.3% m/m and the largest increase in 1-1/2 years.  Conversely, the Japan Apr tertiary industry index rose +0.7% m/m, weaker than expectations of +0.8% m/m.

August gold (GCQ22) Wednesday closed up +6.1 (+0.34%), and July silver closed up +0.466 (+2.22%).  Precious metals Wednesday posted moderate gains on a weaker dollar.  Gold also moved higher on lower global bond yields and increased demand as an inflation hedge after the ECB announced plans to create a new tool to combat unwarranted jumps in bond yields.  Metal prices added to their gains after Wednesday afternoon’s close when Fed Chair Powell downplayed expectations for a more aggressive Fed when he said the next policy move by the FOMC at its July meeting will be a 50 bp or 75 bp rate hike.

The dollar and gold have continued safe-haven support from the negative impact of the worldwide spread of the omicron Covid variant on the global economic recovery.  China has been slowly dropping Covid lockdowns, but elevated Covid cases may keep the country from fully reopening.  Beijing reported more than 50 Covid cases Wednesday for the fifth day in a row, and Shanghai said it will arrange a round of mass Covid testing every weekend until the end of July.  In the U.S., the 7-day average of new Covid infections last Monday rose to a 3-3/4 month high of 118,778.