Dollar Recovers Early Losses as T-Note Yields Jump

The dollar index (DXY00) Tuesday rose slightly by +0.02%.  The dollar Tuesday recovered from a 1-1/2 week low and posted modest gains after a jump in T-note yields sparked short covering in the dollar.  The dollar also found support after the Conference Board US May consumer confidence index unexpectedly rose and after Minneapolis Fed President Kashkari said the Fed should take its time before cutting interest rates.   

The Conference Board US May consumer confidence index unexpectedly rose +4.5 to 102.0, stronger than expectations of a decline to 96.0.

The US Mar S&P CoreLogic composite-20 home price index rose +7.38% y/y, stronger than expectations of +7.30% y/y and the biggest increase in 17 months.

The US May Dallas Fed manufacturing outlook survey unexpectedly fell 4.9 to -19.4, weaker than expectations of an increase to -12.1.

Minneapolis Fed President Kashkari said the US economy has remained “remarkably resilient,” and the Fed should take its time to monitor whether inflation is slowing enough to warrant interest rate cuts.

The markets are discounting the chances for a -25 bp rate cut at 0% for the June 11-12 FOMC meeting and 10% for the following meeting on July 30-31.

EUR/USD (^EURUSD) Tuesday fell back from a 1-1/2 week high and finished down slightly by -0.02%.  A recovery in the dollar Tuesday from early losses to higher on the day sparked long liquidation in the euro.  Another negative factor for the euro was Tuesday’s ECB report that showed a decline in April inflation expectations, a dovish factor for ECB policy.  Hawkish comments Tuesday from ECB Governing Council member Holzmann initially pushed EUR/USD to a 1-1/2 week high when he said he won’t automatically support additional rate cuts by the ECB after June’s rate cut. 

The ECB April 1-year CPI expectations rate eased to +2.9% from +3.0% in March, right on expectations and the lowest in 2-1/2 years.  Also, the April 3-year CPI expectations rate eased to +2.4% from +2.5% in March, slower than expectations of no change at +2.5%.

ECB Governing Council member Holzmann said he “will support” next week’s interest rate cut by the ECB but won’t automatically support moves after June’s rate cut. 

ECB Governing Council member Knot said the ECB is increasingly confident of bringing consumer price growth back to 2% next year and can loosen its “historically tight” monetary policy step by step.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 93% for its next meeting on June 6.

USD/JPY (^USDJPY) Tuesday rose by +0.16%.  The yen on Tuesday gave up an early advance and turned lower after T-note yields moved higher.  The yen Tuesday initially moved higher against the dollar on news that showed Japan’s Apr PPI services prices rose by the most in 9 years, which pushed the 10-year JGB bond yield up to a 12-year high of 1.044% and is hawkish for BOJ policy.

Japan Apr PPI services prices rose +2.8% y/y, stronger than expectations of +2.3% y/y and the largest increase in 9 years.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 27% for the June 14 meeting.

June gold (GCM4) Tuesday closed up +22.0 (+0.94%), and July silver (SIN24) closed up +1.638 (+5.37%).  Precious metals prices on Tuesday rallied, with silver prices closing sharply higher.  Heightened tensions in the Middle East boosted safe-haven demand for gold after an Egyptian soldier was killed in a clash with Israeli troops at a Gaza border crossing and after reports that Israeli tanks had reached the center of Rafah in Gaza.  Silver had carryover support from Tuesday’s +2% jump in copper prices after China added measures to support the property market, which improved the demand outlook for industrial metals. 

Precious metals fell back from their best levels after the dollar recovered from early losses and turned higher when US May consumer confidence unexpectedly increased.  Also, hawkish comments from Minneapolis Fed President Kashkari weighed on precious metals when he said the Fed should take its time to monitor whether inflation is slowing enough to warrant interest rate cuts. 

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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.

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