The dollar index (DXY00) recovered from a 1-week low on Friday and finished up by +0.07%. The fragile and uncertain situation in the Middle East is supporting safe-haven demand for the dollar today after Iran vowed to respond to the US attacks this week on Iran’s rail and maritime infrastructure. Also, higher T-note yields on Friday strengthened the dollar’s interest rate differentials.
The dollar initially moved lower on Friday as easing geopolitical tensions undercut crude oil prices, after an American official said that talks between the US and Iran over a permanent peace deal are continuing, with the US still committed to a diplomatic solution. Also, Al Jazeera reported Friday that Qatar said it supports all efforts to defuse US-Iran tensions. Lower crude oil prices undercut inflation expectations and could prompt the Fed to loosen monetary policy, a negative factor for the dollar.
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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) fell by -0.12% on Friday. The euro was under pressure on Friday from a stronger dollar. Also, Friday’s weaker-than-expected Italian May industrial production report was bearish for the euro. Limiting losses in the euro was Friday’s lower crude oil prices, which are positive for the Eurozone economy and the euro as Europe imports most of its energy.
Italy May industrial production fell -0.3% m/m, weaker than expectations of -0.2% m/m and the biggest decline in 4 months.
The markets are discounting a +12% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.
USD/JPY (^USDJPY) fell by -0.42% on Friday. The yen rose against the dollar on Friday after Japanese Finance Minister Satsuki Katayama said the government wants pension funds to increase investment in domestic assets. Also, Friday’s stronger-than-expected Japanese June producer price report is hawkish for BPJ policy and supportive for the yen. In addition, the yen rose after Reuters reported Friday that the BOJ may raise its 2026 growth forecast at its meeting later this month.
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.
Japan Jun PPI rose +7.1% y/y, stronger than expectations of +6.8% y/y and the fastest pace in 3.25 years.
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) on Friday closed down -27.10 (-0.65%), and September COMEX silver (SIU26) closed down -0.583 (-0.96%).
Gold and silver prices settled lower on Friday amid strength in stocks, which reduced safe-haven demand for precious metals. Also, easing geopolitical risks curbed safe-haven demand for precious metals after an American official said that talks between the US and Iran over a permanent peace deal are continuing, as the US remains committed to finding a diplomatic solution with Iran. Metal prices remained lower on Friday as T-note yields rose.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.5-month low on Monday, after reaching a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to an 11.5-month low on Thursday 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.
