The US dollar index (DXY00) has gained 0.13% in value today, as the currency benefits from a decline in stock markets and hawkish comments from New York Fed President John Williams. The dollar’s strength is largely attributed to the weakness in stocks, which has led to an increase in liquidity demand for the currency.
President Williams’ comments, in which he stated that inflation is still quite high, have also contributed to the dollar’s rise. Furthermore, the recent surge in crude oil prices has pushed up inflation expectations, making it more likely for central banks to maintain their tight monetary policies, thereby supporting the dollar.
Trade Deficit Widens
The US trade deficit has widened to a 14-month high of $77.6 billion in May, the largest deficit in 14 months. This negative factor for Q2 GDP has led to a decline in the dollar’s value from its best level.
However, the dollar’s losses were limited after German May industrial production rose more than expected by 0.9% m/m, the largest increase in 8 months. Additionally, the jump in the 10-year German Bund yield to a 2-week high strengthened the euro’s interest rate differentials.
Currency Markets React to Economic Data
The EUR/USD (^EURUSD) has fallen by 0.10% today, as the euro moves lower against the dollar. Despite losses in the euro, the currency’s decline is limited due to the stronger-than-expected German industrial production data.
The yen has also gained against the dollar, with USD/JPY (^USDJPY) falling by 0.09%. This is largely attributed to positive Japanese economic news, including the rise in the Japan May leading index CI to a 4.75-year high and the decline in Japan May household spending.
Precious Metals Under Pressure
The prices of gold and silver have declined today, as a stronger dollar and rising crude oil prices weigh on the precious metals. Hawkish comments from President Williams have also contributed to the decline in precious metal prices, as he stated that inflation is still quite high.
However, the increase in safe-haven demand from weakness in stocks and renewed tensions in the Middle East have limited losses in precious metals. Additionally, the recent fund liquidation of precious metals has had a bearish effect on prices, as long holdings in gold ETFs fell to a 9.5-month low last Friday.
Strong central bank demand for gold has been a supportive factor for 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.
The swaps markets are discounting the odds at 25% for a +25 bp rate hike at the next FOMC meeting on July 28-29. Meanwhile, the markets are discounting a +1% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.
