Dollar Climbs on Hawkish Fed and Weak Yen

The dollar index (DXY00) on Wednesday rose by +0.628 (+0.60%).  The dollar Wednesday rallied moderately and posted a 1-1/2 week high.  Hawkish Fed comments Wednesday from Fed Chair Powell and Cleveland Fed President Mester supported the dollar.  Also, the yen sank to a new 23-year low against the dollar as divergent central bank policies continue to weigh on the yen.  A negative factor for the dollar was the unexpected downward revision to U.S. Q1 GDP. 

Fed Chair Powell said the U.S. economy is in "strong shape" and "overall the U.S. economy is well-positioned to withstand tighter monetary policy."

Cleveland Fed President Mester said central bankers must not be complacent about increases in long-term inflation expectations and should be "resolute and intentional" in taking actions to bring inflation down.  She added that she wants to see the fed funds rate reach 3.0% to 3.5% this year and "a little bit above 4% next year" to rein in price pressures even if that tips the economy into recession.

U.S. Q1 GDP was unexpectedly revised downward to -1.6% (q/q annualized), weaker than expectations of -1.5% and the steepest pace of contraction since Q2 of 2020.  Q1 personal consumption rose +1.8%, weaker than expectations of +3.1%.  Also, the Q1 core PCE deflator rose +5.2% q/q, stronger than expectations of +5.1% q/q.

EUR/USD (^EURUSD) on Wednesday fell by -0.0079 (-0.75%).  EUR/USD Wednesday dropped to a 1-1/2 week low as lower European government bond yields weakened the euro’s interest rate differentials.  The 10-year German bund yield dropped -10.9 bp Wednesday to 1.519% after German Jun CPI unexpectedly eased.  Also, a fall in Eurozone Jun economic confidence to a 15-month low undercut EUR/USD.

German Jun CPI (EU harmonized) fell -0.1% m/m and rose +8.2% y/y, weaker than expectations of +0.4% m/m and +8.8% y/y.

Eurozone Jun economic confidence fell -1.0 to a 15-month low of 104.0,  although stronger than expectations of 103.0.

Eurozone May M3 money supply rose +5.6% y/y, weaker than expectations of +5.8% y/y and the slowest pace of growth in 2 years.

USD/JPY (^USDJPY) on Wednesday rose by +0.38 (+0.28%).  USD/JPY Wednesday climbed to a new 23-year high.  The yen was under pressure Wednesday and fell to a 23-year low of 137 yen/USD after Fed Chair Powell said the U.S. economy could handle tighter monetary policy.  Divergent central bank policies continue to pressure the yen, with the Fed, BOE, and ECB ending their QE programs and raising interest rates while the BOJ maintains its QE program and record low interest rates. Weaker than expected Japanese economic data Wednesday on May retail sales and Jun consumer confidence also weighed on the yen.

Japan May retail sales rose +0.6% m/m, weaker than expectations of +1.0% m/m.

The Japan Jun consumer confidence index unexpectedly fell -2.0 to a 17-month low of 32.1, weaker than expectations of an increase to 34.8.

August gold (GCQ22) Wednesday closed down -3.7 (-0.20%), and July silver closed down -0.138 (-0.66%).  Gold and silver on Wednesday closed moderately lower.  A rally in the dollar index Wednesday to a 1-1/2 week high undercut metals prices.  Metals prices were also under pressure Wednesday on hawkish comments from Fed Chair Powell and Cleveland Fed President Mester. Silver prices also fell on industrial metals demand concerns after U.S. Q1 GDP contracted more than expected.  Lower global bond yields Wednesday 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.  China reported no new Covid infections in Beijing and Shanghai on Monday for the first time in 4 months.  However, the 7-day average of new U.S. Covid infections rose to a 3-week high of 113,593 on Monday.

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