Dollar Gains as Energy and Political Risks Weigh on the Euro

The dollar index (DXY00) on Wednesday rose by +0.32.  The dollar Wednesday recovered from a 2-week low and posted moderate gains.  Higher T-note yields Wednesday supported the dollar along with weakness in EUR/USD. Long liquidation pressures limited gains in the dollar ahead of the results of Thursday's ECB and BOJ policy meetings. 

Wednesday’s U.S. housing data was bearish for the dollar.  U.S. June existing home sales fell -5.4% m/m to a 2-year low of 5.12 million, weaker than expectations of 5.35 million.

EUR/USD (^EURUSD) on Wednesday fell by -0.48%.  The euro Wednesday fell back from a 2-week high and posted moderate losses on concern that a European energy crisis could push the European economy into recession.  EU President Von Der Leyen said a full cutoff of Russian gas to Europe is a “likely scenario.”  Also weighing on EUR/USD was the larger-than-expected decline in Eurozone July consumer confidence to a record low.

EUR/USD extended its losses Wednesday on signs of political unrest in Italy after three key parties failed to support Prime Minister Draghi in a confidence vote.  Italian President Mattarella may still attempt to forge a majority in parliament for a new government, but the most likely outcome is snap elections this fall.

An easing of price pressures in Germany is supportive for EUR/USD after German June PPI rose +0.6% m/m and +32.7% y/y, weaker than expectations of +1.5% m/m and +33.7% y/y.

The Eurozone July consumer confidence indicator fell -3.2 to a record low of -27.0 (data from 1985), weaker than expectations of -24.9.

USD/JPY (^USDJPY) on Wednesday rose by +0.06%.  Higher T-note yields Wednesday supported the dollar versus the yen.  Also, a rally in the S&P 500 to a 3-week high Tuesday reduced the safe-haven demand for the yen.  Losses in the yen were limited by short-covering ahead of the results of the BOJ’s policy meeting on Thursday where the BOJ may express some concern about the weak yen.

August gold (GCQ22) Wednesday fell by -10.50 (-0.61%), and September silver (SIU22) fell by -0.045 (-0.24%).  Precious metals Wednesday closed moderately lower.  A stronger dollar Wednesday weighed on metals prices along with a rally in the S&P 500 to a 1-1/4 month high, which reduced the safe-haven demand for precious metals.  Ongoing fund liquidation of long gold positions continues to weigh on gold prices as long gold positions in ETFs have dropped for 15 consecutive days to a 4-1/2 month low Tuesday.  Silver prices were also under pressure Wednesday after U.S. June existing home sales fell more than expected to a 2-year low, which is bearish for industrial metals demand.

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 reported 935 new Covid infections on Tuesday, the most in 8 weeks.  Close to 30 million people are under some form of movement restrictions in China as the government maintains its strict Covid-Zero strategy.  Also, Japan reported a record 110,680 new Covid infections Saturday.  In addition, the 7-day average of new U.S. Covid infections rose to a 5-month high of 136,234 on Sunday. 

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