Dollar Index Faces Mixed Performance
The dollar index (DXY00) experienced a slight decline of -0.12% on Tuesday. This drop was partly influenced by a significant -3% fall in WTI crude oil prices, which reached a 7-week low. The decline in oil prices lowered inflation expectations, potentially prompting the Federal Reserve to adopt a more accommodative monetary policy, which is generally bearish for the dollar. Additionally, lower yields on Treasury notes on Tuesday weakened the dollar's interest rate differential, further contributing to its decline.
Despite these challenges, the dollar managed to recover from its lowest levels during the day due to improved U.S. economic data. The April trade deficit narrowed to -$55.9 billion, down from -$56.6 billion in March, and was better than the expected -$56.1 billion. Moreover, May existing home sales increased by +3.2% month-over-month, reaching a 5-month high of 4.17 million, surpassing the forecasted 4.07 million. These positive economic indicators provided some support to the dollar. Additionally, the stock market slump on Tuesday increased demand for liquidity, which also benefited the dollar.
President Trump's Comments on Iran and Oil Prices
President Trump made remarks on Tuesday regarding the potential resolution of the conflict with Iran, suggesting that the war could end soon, which might lead to a decrease in oil prices. He stated, "We're in the final throes of what will be a very, very good deal, and that they could have at least an idea one or two days from now" about the deal. These comments may have had an impact on market sentiment surrounding oil and the dollar.
Market Expectations for Central Bank Actions
The swaps markets are currently pricing in a 3% chance of a 25 basis point rate cut at the next Federal Open Market Committee (FOMC) meeting on June 16-17. This indicates a cautious outlook among traders regarding future monetary policy decisions.
Eurozone Gains as Dollar Weakens
EUR/USD rose by +0.10% on Tuesday, driven by a weaker dollar. The euro benefited from stronger-than-expected economic data from Germany. German April industrial production increased by +0.4% month-over-month, matching expectations and marking the largest rise in five months. Additionally, German April trade data showed better-than-expected results, with exports rising unexpectedly by +0.9% month-over-month and imports increasing by +1.2% month-over-month, both exceeding forecasts.
The markets are also discounting a 100% chance of a 25 basis point rate hike by the European Central Bank (ECB) at its upcoming policy meeting. This expectation is supportive of the euro, as it reflects confidence in the Eurozone economy.
Yen Weakens Against the Dollar
USD/JPY rose by +0.15% on Tuesday, with the yen falling to a 5-week low against the dollar. This decline was fueled by a +2% rally in the Nikkei Stock Index, which reduced safe-haven demand for the yen. However, the yen's losses were somewhat limited by the -3% drop in crude oil prices, which is positive for Japan’s economy given its heavy reliance on imported energy.
A report from Wells Fargo suggested that Japanese authorities are unlikely to intervene in the foreign exchange market to support the yen before the June 16 Bank of Japan (BOJ) meeting unless there is a sharp spike in USD/JPY beyond 162. Despite this, the yen found some support from a hawkish Nikkei report indicating that the BOJ is likely to raise its policy rate by 25 basis points to 1.00% at its next meeting.
Machine Tool Orders Rise in Japan
Japan’s May machine tool orders surged by +37.4% year-over-year, marking the eleventh consecutive monthly increase. This growth highlights continued strength in the manufacturing sector. The markets are currently pricing in a 97% chance of a 25 basis point rate hike by the BOJ at its next policy meeting on June 16.
Precious Metals Face Sharp Declines
August COMEX gold (GCQ26) closed down -77.00 (-1.76%), while July COMEX silver (SIN26) fell by -3.345 (-4.88%). Both precious metals hit 2.5-month lows, driven by a stronger-than-expected U.S. May existing home sales report, which signaled a more hawkish stance from the Fed. Additionally, the Nikkei report suggesting a potential BOJ rate hike added pressure on precious metals.
However, the weaker dollar and the -3% drop in crude oil prices provided some support to gold and silver. These factors eased inflation expectations and could encourage central banks to pursue looser monetary policies, which is typically bullish for precious metals. Furthermore, ongoing tensions between the U.S. and Iran continue to offer safe-haven demand for gold.
Silver Prices Drop Despite Strong Chinese Trade Data
Silver prices fell on Tuesday despite better-than-expected Chinese May trade data, which indicated economic strength and supported demand for industrial metals. China’s May exports rose by +19.4% year-over-year, outperforming expectations of +15.0%, while imports increased by +27.4% year-over-year, exceeding forecasts of +26.0%.
Fund Liquidation and Central Bank Gold Demand
Recent fund liquidation of precious metals has been bearish for prices. Long holdings in gold ETFs fell to a 5.5-month low on March 31 after reaching a 3.5-year high on February 27. Similarly, long holdings in silver ETFs dropped to a 10-month low on Monday after peaking at a 3.5-year high on December 23.
On the other hand, strong central bank demand for gold continues to support gold prices. News revealed that bullion held in China’s People’s Bank of China (PBOC) reserves increased by +320,000 ounces in May, reaching 74.96 million troy ounces, the largest monthly increase in 17 months and the nineteenth consecutive month of growth.
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