Dollar Retreats from 20-Year High on Profit-Taking

The dollar index (DXY00) on Friday fell by -0.139 (-0.13%).  The dollar Friday fell back from a new 20-year high and posted modest losses.  Strength in stocks Friday reduced liquidity demand and fueled profit-taking in the dollar.

The dollar Friday initially rose to a 20-year high after U.S monthly payroll data showed a stronger-than-expected increase in U.S June nonfarm payrolls and a faster-than-expected increase in U.S. June hourly earnings, which bolstered expectations for the Fed to remain aggressive in tightening monetary policy.  Hawkish Fed comments Friday from New York Fed President Williams and Atlanta Fed President Bostic limited losses in the dollar. 

U.S. June nonfarm payrolls rose +372,000, stronger than expectations of +265,000.  The June unemployment rate was unchanged at 3.6%, right on expectations.

U.S. June average hourly earnings rose +5.1% y/y, easing from 5.3% y/y in May and the smallest increase in 6 months but above expectations of +5.0% y/y.

U.S. consumer credit data for May was bearish for the dollar after May consumer credit rose +$22.347 billion, weaker than expectations of +$30.9 billion.

New York Fed President Williams said inflation is "sky-high" and the top threat to the economy.  He added that the Fed is "strongly committed" to returning inflation to 2% and will watch data to determine how high or fast to hike interest rates.

Atlanta Fed President Bostic said, "the tremendous momentum in the economy to me suggests that we can move rates by 75 bp at the July FOMC meeting and not see a lot of protracted damage to the broader economy."

EUR/USD (^EURUSD) on Friday rose by +0.0014 (+0.14%).  EUR/USD Friday recovered from a new 20-year low and posted modest gains.  Dollar weakness Friday sparked short-covering in the euro.  EUR/USD Friday initially fell to a new 20-year low as divergence in government bond yields weakened the euro’s interest rate differentials and pressured the euro, with the 10-year T-note yield climbing to a 1-week high Friday while the 10-year German bund yield was essentially flat.

Italian May industrial production fell -1.1% m/m, a smaller decline than expectations of -1.4% m/m.

USD/JPY (^USDJPY) on Friday rose by +0.06 (+0.04%).  Higher T-note yields Friday weighed on the yen. Also, weaker than expected Japanese economic data Friday weighed on the yen.  USD/JPY spiked lower briefly in overnight trade after former Japanese Prime Minister Abe was assassinated, which temporarily fueled a spike in the safe-haven demand of the yen.

Friday’s weaker-than-expected Japanese economic data was bearish for the yen.  Japan’s May household spending unexpectedly fell -0.5% y/y, weaker than expectations of +2.1% y/y.  Also, the Japan Jun eco watchers expectations outlook survey unexpectedly fell -4.9 to a 4-month low of 47.6, weaker than expectations of an increase to 53.6.

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