Dollar Falls on Soaring Stocks and Lower T-Note Yields

The dollar index (DXY00) on Friday fell by -0.42% and dropped to a 3-1/2 week low.  The dollar Friday gave up an early advance and posted moderate losses.  Strength in stocks Friday curbed liquidity demand for the dollar after the S&P 500 climbed to a 7-week high.  The dollar Friday initially moved higher as T-note yields rose temporarily on inflation concerns after the U.S. Q2 employment cost index and the June core PCE deflator rose more than expected.  However, T-note yields on Friday gave up early gains and turned lower, which weighed on the dollar.

U.S. June personal spending rose +1.1% m/m, slightly stronger than expectations of +1.0% m/m. U.S. personal income rose +0.6% m/m, stronger than expectations of +0.5% m/m.

The U.S. June core PCE deflator rose +0.6% m/m and +4.8% y/y, stronger than expectations of +0.5% m/m and +4.7% y/y.

The U.S. Q2 employment cost index eased to +1.3% from +1.4% in Q1, still stronger than expectations of +1.2%.

The U.S. July MNI Chicago PMI fell -3.9 to a nearly 2-year low of 52.1, weaker than expectations of 55.0.

The University of Michigan U.S. July consumer sentiment was revised upward by 0.4 to 51.5, stronger than expectations of no change at 51.1.

Hawkish comments Friday from Atlanta Fed President Bostic were supportive of the dollar when he said the U.S. economy was "a ways" from entering a recession and that the Fed has further to raise interest rates to get inflation under control.

EUR/USD (^EURUSD) on Friday rose by +0.17%.  EUR/USD Friday recovered from early losses and posted moderate gains. The euro found support Friday on comments from ECB Vice President Guindos, who said the ECB was “watching” the exchange rate of the euro.  EUR/USD also rose Friday after Eurozone Q2 GDP expanded more than expected.  EUR/USD on Friday initially moved lower on concern record inflation pressures in the Eurozone will force the ECB to aggressively tighten monetary policy that pushes the economy into recession after Eurozone July CPI rose at the fastest pace on record.

ECB Vice President Guindos said the ECB doesn't target the exchange rate, "but it is a very important macroeconomic indicator that we take into account."

Eurozone July CPI rose a record +8.9% y/y, stronger than expectations of +8.7% y/y.  Eurozone July core CPI rose a record +4.0% y/y, stronger than expectations of +3.9% y/y. 

Eurozone Q2 GDP rose +0.7% q/q and +4.0% y/y, stronger than expectations of +0.2% q/q and +3.4% y/y.

USD/JPY (^USDJPY) on Friday fell by -0.68% and posted a 6-week low. USD/JPY Friday gave up early gains and turned lower as a decline in the 10-year T-note yield supported gains in the yen.  Also, strength in Japanese industrial activity was bullish for the yen after Friday’s data showed Japan June industrial production rose at a record pace. USD/JPY Friday initially moved higher after U.S. inflation concerns pushed T-note yields higher.  However, T-notes retreated as the 10-year T-note yield fell to a 3-1/2 month low of 2.616%, which sparked short-covering in the yen.

The Japan July consumer confidence index fell -1.9 to a 1-1/2 year low of 30.2, weaker than expectations of 31.5. 

Japan June industrial production rose a record +8.9% m/m, stronger than expectations of +4.2% m/m.

Japan Jun retail sales unexpectedly fell -1.4% m/m, weaker than expectations of +0.2% m/m and the biggest decline in 14 months.

August gold (GCQ22) Friday rose by +12.60 (+0.72%), and September silver (SIU22) rose by +0.329 (+1.66%).  Precious metals on Friday extended Thursday’s sharp gains, with gold posting a 3-week high and silver posting a 4-week high.  A decline in the dollar index to a 3-1/2 week low Friday was bullish for metals prices. Signs of rising global price pressures also sparked increased demand for precious metals as a hedge against inflation. Friday’s data showed Eurozone July CPI rose a record +8.9% y/y, and the U.S. Q2 employment cost index rose +1.3%, stronger than expectations of +1.2%.

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.

• Stocks Climb on Blowout Earnings from Amazon
• Dollar Under Pressure as U.S. Q2 GDP Unexpectedly Contracts
• Stocks Slide on Recession Concerns
• Dollar Retreats on Strong Stocks and Dovish Powell Comments