The dollar index (DXY00) is up by +0.09% today. The dollar is supported by today’s equity market slump, which has boosted liquidity demand for the currency. Also, higher crude oil prices today have pushed up inflation expectations and could persuade the Fed to keep monetary policy tight, a supportive factor for the dollar. In addition, the escalation of hostilities between the US and Iran has boosted demand for the dollar as a safe haven.
The US launched strikes against more than 80 targets in Iran in response to Iran attacking commercial shipping in the Strait of Hormuz. Also, President Trump said the ceasefire with Iran is over, raising the prospect of renewed hostilities in the region.
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The swaps markets are discounting the odds at 34% for a +25 bp rate hike at the next FOMC meeting on July 28-29.
EUR/USD (^EURUSD) today is down by -0.03%. The euro is under pressure today from a stronger dollar. Also, today’s 6% surge in crude oil prices is bearish for the Eurozone economy and the euro, as Europe imports most of its energy. The euro recovered from its worst level after ECB Governing Council member Joachim Nagel warned that he can’t rule out another increase in interest rates by the ECB.
ECB Governing Council member and Bundesbank President Joachim Nagel said he can’t rule out another ECB interest rate increase due to the recent setback with Iran.
The markets are discounting a +15% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.
USD/JPY (^USDJPY) is up by +0.28% today. The yen is sliding today amid a stronger dollar. Also, today’s +6% jump in crude oil prices is bearish for the Japanese economy and the yen as Japan imports more than 90% of its energy. In addition, higher T-note yields today are negative for the yen. moved slightly higher on Tuesday amid some positive Japanese economic news after the Japan May leading index CI rose to a 4.75-year high and May household spending fell less than expected. Also,
Losses in the yen are limited as today’s -2% plunge in the Nikkei Stock Index boosted safe-haven demand for the yen. Also, today’s Japanese economic news that showed the Jun eco watchers outlook survey rose more than expected to a 4-month high was bullish for the yen. In addition, stronger Japanese government bond yields have strengthened the yen’s interest rate differentials after the 10-year JGB yield climbed to a 29-year high of 2.883% today.
The risk of intervention in currency markets to support the yen is high, as the yen remains firmly above 160 per dollar at a 39-year low. Japanese authorities have intervened in the forex market several times in the past when the yen reached that level.
The markets are discounting a +2% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.
August COMEX gold (GCQ26) today is down -89.40 (-2.14%), and September COMEX silver (SIU26) is down -2.625 (-4.28%).
Gold and silver prices are sharply lower today. The stronger dollar today is weighing on precious metals along with higher global bond yields. Also, today’s +6% jump in crude oil prices raises inflation expectations and could prompt central banks worldwide to keep their monetary policies restrictive, a bearish factor for precious metals. In addition, hawkish comments today from ECB Governing Council member Joachim Nagel weighed on precious metals, as he said he can’t rule out another ECB interest rate increase.
Precious metals have some safe-haven support amid weakness in stocks and renewed tensions in the Middle East following US attacks on Iran in response to attacks on shipping in and around the Strait of Hormuz.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.5-month low last Friday, after reaching a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to an 11.5-month low on Monday from the 3.5-year high posted 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 boosted its gold reserves.
