Dollar Climbs on Monetary Policy Divergence

The dollar index (DXY00) on Thursday rose +0.25% and posted a new 20-year high. A stronger-than-expected increase in the U.S. June PPI bolstered expectations for the Fed to maintain its aggressive rate hike stance, which is bullish for the dollar.  Also, weakness in other G-10 currencies was supportive for the dollar, with EUR/USD tumbling to a new 20-year low Thursday and the yen plunging to a new 24-year low on central bank policy divergence. 

U.S. weekly initial unemployment claims unexpectedly rose +9,000 to an 8-month high of 244,000, showing a weaker labor market than expectations of no change at 235,000.

The U.S. Jun final-demand PPI rose +1.1% m/m and +11.3% y/y, stronger than expectations of +0.8% m/m and +10.7% y/y.  Jun PPI ex-food & energy rose +8.2% y/y, right on expectations and easing from the +8.5% y/y increase in May.

Fed comments Thursday were supportive of the dollar.  St. Louis Fed President Bullard said he "would advocate a 75 bp rate hike later this month" rather than a bigger move because it brings the funds rate to roughly the neutral level as seen by policymakers.  Also, Fed Governor Waller said, "with the U.S CPI data in hand, I support another 75 bp rate increase this month," but could vote for more aggressive action if coming economic reports point to further inflation risks.

EUR/USD (^EURUSD) Thursday slid to a new 20-year low and fell by -0.39%. EUR/USD was under pressure Thursday after the European Commission cut its 2022 Eurozone GDP forecast and raised its 2022 Eurozone inflation forecast.  Also, political instability in Italy weighed on EUR/USD after Prime Minister Draghi said Thursday offered to resign when Italy’s Five Star Movement said it would refuse to back his government in a confidence vote.

The European Commission cut its 2022 Eurozone GDP forecast to +2.6% from a May forecast of +2.7% and raised its 2022 Eurozone inflation estimate to +7.6%, up from a May forecast of +6.1%.

The German Jun wholesale price index rose +21.2% y/y, easing further from April's record high of +23.8% y/y.

USD/JPY (^USDJPY) Thursday rallied to a new 24-year high and rose +1.14%. Higher T-note yields Thursday weighed on the yen.  Also, the larger-than-expected increase in Thursday’s U.S. June PPI will keep the pressure on the Fed to keep an aggressive rate-hike stance, which could further weaken the yen’s interest rate differentials against the dollar.  A worsening pandemic situation in Japan may lead to lockdowns and restrictions that derail economic growth and are bearish for the yen.  Tokyo Thursday raised its Covid infection alert to the highest level after it reported 16,878 new Covid infections Wednesday, up more than +400% from July 1.

Japan May industrial production was revised downward to -7.5% m/m from the previously reported -7.2% m/m, the steepest pace of decline in 2 years.

August gold (GCQ22) Thursday fell by -29.70 (-1.71%), and September silver (SIU22) fell by -0.969 (-5.05%).  Precious metals Thursday sold off, with gold falling to an 11-month low and silver tumbling to a 2-year low.  A rally in the dollar index Thursday to a new 20-year high undercut metals prices. Higher global government bond yields Thursday also weighed on gold prices.  Expectations for the Fed to pursue aggressive interest rate hikes also weighed on metals after Thursday’s data showed that the U.S. Jun PPI rose faster than expected.

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.  Close to 30 million people are under some form of movement restrictions in China as the government maintains its strict Covid-Zero strategy.  Also, Tokyo Thursday raised its Covid infection alert to the highest level after it reported 16,878 new Covid infections Wednesday, up more than +400% from July 1.  In addition, 

the 7-day average of new U.S. Covid infections rose to a 5-month high of 137,006 Wednesday.

• Stocks Tumble on Weak Bank Earnings and Strong US PPI
• Stocks Tumble on Weak Bank Earnings and Strong US PPI
• Dollar Falls Back on Lower T-Note Yields and Rebound in Stocks
• Stocks Slide as Strong CPI Keeps Aggressive Fed in Play