Dollar Gains on Hawkish Fed Comments

The dollar index (DXY00) on Thursday rose by +0.209 (+0.20%).  The dollar Thursday posted moderate gains on hawkish Fed comments. Also, weakness in EUR/USD supported gains in the dollar.  However, gains in the dollar were limited by weaker-than-expected U.S. economic data and lower T-note yields.

Hawkish Fed comments Thursday were supportive of the dollar.  Fed Chair Powell said, "we have a labor market that is sort of unsustainably hot, and we're very far from our inflation target."  He added that his commitment to curbing inflation was "unconditional."  Also, Fed Governor Bowman said, "based on current inflation readings, I expect that an additional increase of 75 bp will be appropriate at our next meeting as well as increases of at least 50 bp in the next few subsequent meetings, as long as the incoming data support them."

U.S. economic data Thursday was weaker than expected and bearish for the dollar.  U.S. weekly initial unemployment claims fell -2,000 to 229,000, showing a slightly weaker labor market than expectations of 226,000. Also, the Q1 current account deficit was a record -$291.4 billion, wider than expectations of -$275.0 billion.  In addition, the Jun S&P Global manufacturing PMI fell -4.6 to a nearly 2-year low of 52.4, weaker than expectations of 56.0.

EUR/USD (^EURUSD) on Thursday fell by -0.0040 (-0.38%).  Economic concerns weighed on the euro Thursday after Eurozone June PMI data on manufacturing and service activity fell more than expected.  Lower European government bond yields also weighed on EUR/USD after the 10-year German bund yield fell to a 1-1/2 week low Thursday at 1.391%.

The Eurozone Jun S&P Global manufacturing PMI fell -2.6 to a 1-3/4 year low of 52.0, weaker than expectations of 53.8.  Also, the Eurozone Jun S&P Global composite PMI fell -2.9 to a 16-month low of 51.9, weaker than expectations of 54.0.

USD/JPY (^USDJPY) on Thursday fell by -1.27 (-0.93%).  USD/JPY retreated Thursday after a decline in T-note yields boosted the yen.  The 10-year T-note yield dropped to a 1-1/2 week low Thursday, which sparked short-covering in the yen.  The yen also rallied Thursday after Takehiko Nakao, former head of foreign exchange policy at Japan’s finance ministry, said “unilateral intervention shouldn’t be eliminated as a possibility” to stem the yen’s slide.

August gold (GCQ22) Thursday closed down -8.6 (-0.47%), and July silver closed down -0.379 (-1.77%).  Precious metals Thursday closed moderately lower, with silver posting a 1-week low.  A stronger dollar and expectations for additional Fed rate hikes weighed on metals Thursday after Fed Chair Powell said that “ongoing rate increases will be appropriate.”  Silver prices also fell after Thursday’s data showed Eurozone and U.S. manufacturing activity declined more than expected, a bearish sign for industrial metals demand. A decline in global bond yields Thursday limited losses in gold.

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.  New Covid infections in China fell to 22 on Tuesday, a 4-month low.  Also, the 7-day average of new U.S. Covid infections fell to a 3-week low of 90,092 on Monday.

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