The dollar index (DXY00) on Wednesday fell back from a new 20-year high and fell -0.11%. The dollar gave up an early advance Wednesday and turned lower after T-note yields declined. Also, a recovery in stocks from early losses reduced the liquidity demand for the dollar. Weakness in the yen Wednesday limited losses in the dollar after USD/JPY climbed to a new 24-year high. The dollar Wednesday initially rallied to a new 20-year high after a larger than expected increase in U.S. June CPI bolstered expectations for the Fed to maintain aggressive rate hikes.
U.S. June CPI rose +9,1% y/y, stronger than expectations of +8.8% y/y and the largest increase in 41 years. The June CPI ex-food & energy eased to 5.9% y/y from 6.0% y/y in May, but was stronger than expectations of 5.7% y/y.
Comments Wednesday from Atlanta Fed President Bostic were hawkish and supportive of the dollar. He said "everything is in play" for policy action after data showed U.S. consumer prices rose more than expected last month to a fresh four-decade high.
The Fed Beige Book Wednesday mentioned recession concerns and was bearish for the dollar. The Beige Book said that while economic activity "expanded at a modest pace, on balance, since mid-May," several Fed districts "reported growing signs of a slowdown in demand." and some contacts noted "concerns over an increased risk of a recession." The Beige Book also said price increases remained "substantial" across the U.S. in recent weeks though some areas saw signs that inflation was cooling.
EUR/USD (^EURUSD) Wednesday recovered from a new 20-year low and rose by +0.25%. Dollar weakness Wednesday was supportive of the euro. Gains in EUR/USD accelerated Wednesday after ECB Governing Council member and Bank of France Governor Villeroy de Galhau said the ECB is watching the euro’s drop because of its effect on consumer prices.
Wednesday’s Eurozone economic data was bullish for EUR/USD after Eurozone May industrial production rose +0.8% m/m, stronger than expectations of +0.3% m/m and the biggest increase in 5 months.
USD/JPY (^USDJPY) Wednesday climbed to a new 24-year high and rose +0.34%. A +0.54% rally in the Nikkei Stock Index Wednesday reduced the safe-haven demand for the yen. Also, divergent central bank policies continue to weigh on the yen as the BOJ insists it will maintain QE and record-low interest rates while other G-10 central banks end their QE programs and raise interest rates.
August gold (GCQ22) Wednesday rose by +10.70 (+0.62%), and September silver (SIU22) rose by +0.236 (+1.24%). Precious metals Wednesday rose moderately as a weaker dollar sparked short covering. Gold prices also garnered support Wednesday from a decline in T-note yields. In addition, a larger-than-expected increase in U.S. Jun CPI spurred demand for gold as an inflation hedge. Silver prices found support from strong Chinese trade data that is bullish for global growth prospects and industrial metals demand after China Jun exports rose +17.9% y/y, stronger than expectations of +12.5% y/y and the biggest increase in 5 months.
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. Shanghai reported 59 new Covid infections Monday, the fourth day in a row case numbers have stayed above 50. Already, close to 30 million people are under some form of movement restrictions in China as the government maintains its strict Covid-Zero strategy. Also, the 7-day average of new U.S. Covid infections rose to a 5-week high of 125,768 Tuesday.
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