The dollar index (DXY00) saw a slight rise of +0.03% on Wednesday, bouncing back from early losses amidst conflicting reports regarding a potential US-Iran deal to reopen the Strait of Hormuz. Iranian television claimed to have obtained an unofficial draft of the memorandum, suggesting a lifting of the naval blockade by US forces in exchange for restored commercial shipping access for Iran. However, US officials quickly refuted these claims, labeling the draft as a fabrication. The dollar also found support from the May Richmond Fed manufacturing survey, which showed current conditions reaching a 4.5-year high.
Initially, the dollar faced downward pressure as WTI crude oil prices plummeted by over 5%, leading to reduced inflation expectations and the possibility of Fed monetary policy easing. Additionally, the Chinese yuan’s rally to a 3.25-year high weighed on the dollar’s performance.
In other news, the US May Richmond Fed manufacturing survey indicated a robust growth of +10, surpassing expectations with a 4.5-year high of 13. Meanwhile, swaps markets suggested a mere 4% probability of a 25 bp rate cut at the upcoming FOMC meeting on June 16-17.
The EUR/USD (^EURUSD) pair dipped from a 1-week peak on Wednesday, closing down by -0.01%. The dollar’s recovery throughout the day triggered a wave of long liquidation in the euro, exacerbated by downgraded GDP forecasts for Germany by economic advisers. However, the euro initially gained ground following hawkish comments from ECB member Yannis Stournaras hinting at a potential interest rate hike in June.
Furthermore, Eurozone April new car registrations surged by +5.1% year-on-year to 972,000 units, signaling positive economic activity. Stournaras reiterated the likelihood of an ECB interest rate hike in June, citing prolonged Middle East conflicts and subsequent energy price hikes as contributing factors.
On the currency front, USD/JPY (^USDJPY) witnessed a +0.14% increase on Wednesday, with the yen sliding to a 3.5-week low against the dollar. This decline was fueled by Japan’s April PPI service prices falling short of expectations, indicating a dovish stance on BOJ policy. Despite these losses, the yen’s downward momentum was tempered by lower T-note yields and the drop in crude oil prices, which benefit Japan’s import-heavy economy.
Looking at precious metals, June COMEX gold (GCM26) closed down by -1.20%, while July COMEX silver (SIN26) dropped by -2.23% on Wednesday. The strengthening dollar and hawkish central bank sentiments weighed on gold and silver prices, with concerns about industrial metals demand adding further pressure.
The recent fund liquidation of precious metals has also been bearish for prices, as evidenced by decreased holdings in gold and silver ETFs. However, strong central bank demand for gold, particularly highlighted by China’s PBOC increasing its gold reserves, provides support for gold prices.
In conclusion, the financial markets continue to navigate through a complex web of geopolitical tensions, economic data, and central bank policies, shaping the trajectory of various asset classes. Stay tuned for more updates on these developments.
