Dollar Falls on Euro Strength and Dovish Comments from Fed Chair Powell

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The dollar index (DXY00) on Tuesday fell by -0.20% and posted a 1-week low. The dollar retreated Tuesday due to strength in the euro.  The dollar extended its losses Tuesday morning after Fed Chair Powell said he doesn’t see the Fed’s next move as a rate hike. 

US Apr PPI final demand rose +2.2% y/y, which was right on expectations.  The Apr PPI ex-food and energy rose +2.4% y/y, unchanged from March but slightly stronger than expectations of +2.3% y/y.

Fed Chair Powell said, “Q1 in the US was notable for lack of inflation progress, and that told us that we’ll need to be patient and let restrictive policy do its work.” He added, “I don’t think it’s likely that the next move would be a rate hike, but it is more likely that we will hold the policy rate where it is.”

The markets are discounting the chances for a -25 bp rate cut at 10% for the June 11-12 FOMC meeting and 32% for the following meeting on July 30-31.

EUR/USD (^EURUSD) Tuesday rallied to a 1-month high and finished up by +0.29%.  The euro found support Tuesday after the German May ZEW survey expectations of economic growth index rose more than expected to a 2-1/4 year high.  The euro added to its gains Tuesday due to hawkish comments from ECB Governing Council member Wunsch, who said the ECB shouldn’t rush into further interest rate cuts after a likely first cut in June.

The German May ZEW survey expectations of economic growth index rose +4.2 to a 2-1/4 year high of 47.1, stronger than expectations of 46.4.

ECB Governing Council member Wunsch said the ECB shouldn’t rush into further interest rate cuts after a likely first cut in June as “wage pressures still persist, which is keeping inflation high in the services sector.”

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 92% for its next meeting on June 6.

USD/JPY (^USDJPY) on Tuesday rose by +0.13%.  The yen fell to a 1-1/2 week low against the dollar Tuesday and remains under pressure on speculation that Japanese authorities won’t intervene again in the forex market anytime soon to support the yen after Masato Kanda, Japan’s top currency official, said last Tuesday that the government doesn’t need to intervene in the forex market if market movements are orderly.  Losses in the yen were limited due to higher Japanese government bond yields after the 10-year JGB bond yield Tuesday matched an 11-year high of 0.974%.

Tuesday’s Japanese economic news was mixed for the yen.  On the negative side, Japan’s Apr machine tool orders fell -11.6% y/y, the sixteenth consecutive month orders have declined.  Conversely, Japan’s Apr PPI rose +0.9% y/y, unchanged from March and slightly stronger than expectations of +0.8% y/y.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 38% for the June 14 meeting.

June gold (GCM4) Tuesday closed up +16.9 (+0.72%), and July silver (SIN24) closed up +0.259 (+0.91%).  Precious metals prices settled moderately higher on Tuesday. Tuesday’s decline in the dollar index to a 1-week low supported precious metals.  Also, ongoing Middle East tensions have boosted safe-haven support demand for precious metals.  Gold prices extended their gains Tuesday morning after Fed Chair Powell said he doesn’t see the Fed’s next move as a rate hike.  Silver has carryover support from Tuesday’s +2% rally in copper prices to a 2-year high. 

Gains in precious metals Tuesday were limited after the US Apr core PPI rose slightly more than expected, which was hawkish for Fed policy.  Fund liquidation of gold holdings is negative for gold after long gold holdings in ETFs fell to a 4-1/2 year low Monday.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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