Dollar Supported by Higher T-Note Yields and Crude Prices

The dollar index (DXY00) rose by +0.18% on Monday.  The dollar strengthened on Monday as escalation of hostilities between the US and Iran is boosting crude oil prices, which raises inflation expectations that could prompt the Fed to tighten monetary policy, a supportive factor for the dollar.  The dollar also received some safe-haven support on Monday on signs of widening of the conflict in the Middle East after Houthi rebels said they will impose a maritime blockade on Saudi Arabia in retaliation for what they say is the kingdom’s siege on the Yemeni capital.  

Monday’s US economic news was slightly negative for the dollar after the Jun leading indicators fell -0.2% m/m, weaker than expectations of -0.1% m/m.

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The US conducted a ninth straight day of airstrikes on Iran on Monday, bombing military targets and communications networks, and Iran retaliated by launching drones and missiles at US bases in Kuwait, Jordan, Bahrain, and Iraq.  The New York Times reported that the US is sending more warplanes to the Middle East, including F-35 and F-16 fighter jets, a possible sign that US military operations could expand in the coming days.  Also, President Trump on Monday vowed Iran “will pay” for killing three US soldiers in recent days.

The swaps markets are discounting the odds at 17% for a +25 bp rate hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) fell by -0.22% on Monday.  The dollar’s strength on Monday weighed on the euro. Also, Monday’s German June producer price report showed prices eased to +1.8% y/y, below the ECB’s 2% inflation target, a dovish factor for ECB policy and negative for the euro.  Higher crude oil prices on Monday are negative for the Eurozone economy and the euro, as Europe imports most of its energy.

The markets are discounting a +5% chance of a +25 bp rate hike by the ECB at its next policy meeting on Thursday.

USD/JPY (^USDJPY) rose by +0.06% on Monday.  The yen fell to a 1-week low against the dollar on Monday amid dollar strength.  Also, higher crude oil prices on Monday pressured the yen, as they are bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy.  In addition, higher T-note yields on Monday were bearish for the yen.  Trading in the yen was muted, as markets in Japan were closed on Monday for the Marine Day holiday. 

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 surpassed that level.

The markets are discounting a +1% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) on Monday closed down -2.90 (-0.07%), and September COMEX silver (SIU26) closed up +0.746 (+1.32%).

Gold and silver prices settled mixed on Monday.  Dollar strength on Monday undercut precious metals prices.  Also, higher global bond yields on Monday were bearish for precious metals.  In addition, higher crude oil prices on Monday raised inflation expectations and could prompt the world’s central banks to tighten monetary policy, a bearish factor for precious metals.

Precious metals found some safe-haven support on Monday after the US conducted a ninth straight day of airstrikes on Iran, bombing military targets and communications networks, and Iran retaliated by launching drones and missiles at US bases in Kuwait, Jordan, Bahrain, and Iraq.  Also, a possible widening of the conflict in the Middle East spurred some safe-haven demand for precious metals after Houthi rebels said they will impose a maritime blockade on Saudi Arabia in retaliation for what they say is the kingdom’s siege on the Yemeni capital. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.75-month low today, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 1-year low last Tuesday 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 +480,000 ounces to 75.44 million troy ounces in June, the twentieth consecutive month the PBOC boosted its gold reserves.

On the date of publication,

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