Dollar Falls Back on Strong Stocks and Lower T-Note Yields

The dollar index (DXY00) on Friday fell by -0.42%.  A rally in stocks Friday reduced the liquidity demand for the dollar. Also, lower T-note yields Friday weighed on the dollar.  Comments Friday from Atlanta Fed President Bostic undercut the dollar when he said he doesn't favor a 100 bp rate hike at the July 26-27 FOMC meeting.  Friday’s U.S economic data was mixed for the dollar.

U.S. June retail sales rose +1.0% m/m and +1.0% m/m ex-autos, stronger than expectations of +0.9% m/m and +0.7% m/m ex-autos.

The U.S. July Empire manufacturing survey general business conditions index unexpectedly rose +12.3 to 11.1, stronger than expectations of a decline to -2.0.

U.S. June import prices ex-petroleum unexpectedly fell -0.4% m/m, weaker than expectations of +0.2% m/m and the largest decline in more than 2 years.

U.S. June manufacturing production fell -0.5% m/m, weaker than expectations of -0.1% m/m.

The University of Michigan’s July U.S. consumer sentiment index unexpectedly rose +1.1 to 51.1, stronger than expectations of no change at 50.0.  The 5-10 year inflation expectations fell to 2.8%, lower than expectations of 3.0% and the lowest in a year.

Atlanta Fed President Bostic said he doesn't favor a 100 bp rate hike at the July FOMC meeting and said a 75 bp rate increase is a "very big move" compared to past practice and "if we went" much larger, "people would be concerned."

EUR/USD (^EURUSD) Friday rose by +0.58%.  Short covering Friday pushed EUR/USD higher after political risks in Italy eased when Italian President Mattarella asked Prime Minister Draghi to remain in his position in order to avert a political crisis.  Prime Minister Draghi had offered his resignation Thursday after Italy’s Five Star Movement boycotted a confidence vote in the Senate.  The move by President Mattarella leaves the door open for a solution that would see Draghi leading the government until elections due in early 2023.  Gains in EUR/USD Friday were limited after the 10-year German bund yield fell to a 1-1/2 month low of 1.073%.

Hawkish comments Friday from ECB Governing Council member Rehn were bullish for EUR/USD when he said the ECB would start raising interest rates next week with a "likely" 25 bp hike, followed by a "likely" 50 bp rate hike in September. 

USD/JPY (^USDJPY) Friday fell -0.20%.   The yen Friday moved moderately higher and consolidated just above Thursday's 24-year low against the dollar.  The yen strengthened Friday on comments from Japanese Prime Minister Suzuki, who said, “I am worried about the rapid slide in the yen and the speculative move seen behind it.”  Suzuki’s comments suggest the BOJ may soon intervene in the forex market in an attempt to stop the yen’s slide.  Lower T-note yields Friday also supported gains in the yen.

August gold (GCQ22) Friday fell by -2.20 (-0.13%), and September silver (SIU22) rose by +0.369 (+2.02%).  Precious metals Friday settled mixed.  A weaker dollar Friday was supportive of metals prices.   Gold posted modest losses Friday and held above Thursday’s 11-month low.  Strength in stocks Friday has curbed safe-haven demand for precious metals. Also, demand for gold as an inflation hedge declined Friday after U.S. Jun import prices unexpectedly fell. Lower global government bond yields Friday helped to limit losses in gold prices. 

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 1-1/4 month high of 130,378 Thursday.

• Stocks Rally as Inflation Expectations Fall
• 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