The dollar index (DXY00) on Wednesday rose by +0.06%. The dollar recovered from early losses on Wednesday and posted modest gains after crude oil prices surged. WTI crude rallied by more than 2% on Wednesday, boosting inflation expectations that could prompt the Fed to tighten monetary policy, a supportive factor for the dollar. Also, Wednesday’s stock market slump boosted liquidity demand for the dollar. The dollar initially moved lower on Wednesday after US May consumer prices rose as expected, easing inflation fears and potentially keeping the Fed from tightening monetary policy.
US May CPI rose +4.2% y/y, right on expectations and the fastest pace of increase in 3 years. May core CPI rose +2.9% y/y, right on expectations, and the fastest pace of increase in 7 months.
The dollar also benefits from safe-haven demand amid the ongoing hostilities between the US and Iran. Overnight, the US and Iran exchanged strikes, and the US said it had completed an operation that saw fighter jets strike Iranian air defenses, ground control stations, and radar sites near the Strait of Hormuz in retaliation for Iran shooting down a US Apache helicopter. In response, Iran launched missiles at four US military targets and fired drones at the main US naval base in the Middle East, located in Bahrain, and struck Ali Al Salem air base in Kuwait. President Trump said that Iran has taken too long to make a deal and that they will now have to “pay the price,” fueling concerns that the US may escalate military attacks on Iran.
The swaps markets are discounting the odds at +3% for a +25 bp rate cut hike at the next FOMC meeting on June 16-17.
EUR/USD (^EURUSD) on Wednesday rose by +0.01%. The euro posted modest gains on Wednesday amid expectations that the ECB will raise interest rates by +25 bp on Thursday. However, gains in the euro were limited as Wednesday’s +2% rally in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy.
The markets are discounting a +99% chance for a +25 bp rate hike by the ECB at Thursday’s policy meeting.
USD/JPY (^USDJPY) on Wednesday rose by +0.10%. The yen added to Tuesday’s losses on Wednesday and fell to a fresh 5-week low against the dollar. Wednesday’s +2% rally in crude oil prices is bearish for the Japanese economy and the yen as Japan imports more than 90% of its energy needs. Also, higher T-note yields on Wednesday were negative for the yen.
Losses in the yen were limited on Wednesday after Japan’s May producer prices rose more than expected, a hawkish factor for BOJ policy. The yen also has carryover support from Tuesday’s hawkish report from Nikkei, which stated that the BOJ is set to raise its policy rate by 25 bp to 1.00% at next week’s policy meeting.
Japan May PPI rose +0.9% m/m and +6.3% y/y, stronger than expectations of +0.8% m/m and +5.6% y/y, with the +6.3% y/y gain the largest year-on-year increase in more than 3 years.
The markets are discounting a +100% chance of a +25 bp BOJ rate hike at the next policy meeting on June 16.
August COMEX gold (GCQ26) on Wednesday closed down -153.10 (-3.57%), and July COMEX silver (SIN26) closed down -0.500 (-0.77%).
Gold and silver prices retreated on Wednesday, with gold sinking to a 6.5-month low and silver falling to a 2.5-month low. The ongoing hostilities between the US and Iran are keeping crude oil prices elevated, which are boosting inflationary pressures that could prompt the world’s central banks to tighten monetary policy, a bearish factor for precious metals. Also, expectations that the ECB will raise interest rates at Thursday’s policy meeting and that the BOJ will raise rates at next week’s meeting have fueled liquidation of long positions in precious metals. In addition, a recovery in the dollar from early losses to higher levels on Wednesday pressured precious metals prices.
Precious metals have some support on concerns that hostilities between the US and Iran could escalate, boosting some safe haven demand for precious metals after President Trump said today that Iran has taken too long to make a deal and that they will now have to “pay the price,” fueling concerns that the US may escalate military attacks on Iran.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5.5-month low on March 31 after climbing to a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 10-month low on Monday after rising to a 3.5-year high on December 23.
Strong central bank demand for gold is supportive of gold prices, following news that bullion held in China’s PBOC reserves rose by +320,000 ounces to 74.96 million troy ounces in May, the largest monthly increase in 17 months, and the nineteenth consecutive month the PBOC has boosted its gold reserves.
