Dollar Edges Higher as Crude Oil Prices and Bond Yields Climb

The dollar index (DXY00) rose by +0.23% on Tuesday.  The dollar moved higher on Tuesday as the 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.  Higher T-note yields on Tuesday also strengthened the dollar's interest rate differentials.  However, Tuesday's rally in stocks has curbed liquidity demand for the dollar, limiting the currency's gains.

The US and Iran exchanged strikes for a 10th consecutive day as mediators sought to revive a truce, with the US targeting military command centers, launch sites and air defenses in Iran and Iran attacking US military sites in Kuwait and Jordan.  The UK navy also reported today that Iran struck two vessels around the Strait of Hormuz.  President Trump said on Tuesday that the US has "no interest" in meeting with Iran until they are ready for serious peace negotiations.

The swaps markets are discounting the odds at 26% for a +25 bp rate hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) fell by -0.11% on Tuesday.  The euro moved lower on Tuesday amid a stronger dollar. Also, Tuesday's +2% rally in crude oil prices to a 5-week high is negative for the Eurozone economy and the euro, as Europe imports most of its energy.  However, losses in the euro were limited after the German Jul ZEW survey expectations of economic growth rose more than expected to a 5-month high. 

The German Jul ZEW survey expectations of economic growth rose +15.8 to a 5-month high of 26.3, stronger than expectations of 15.3.

The markets are discounting a +4% chance of a +25 bp rate hike by the ECB at its next policy meeting on Thursday.

USD/JPY (^USDJPY) rose by +0.44% on Tuesday.  The yen tumbled to a new 39-year low against the dollar on Tuesday.  Crude oil prices rallied to a 5-week high on Tuesday, pressuring the yen, as it is bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy.  Also, higher T-note yields on Tuesday weighed on the yen.  In addition, Tuesday's +3% jump in the Nikkei Stock Index has reduced safe-haven demand for the yen. 

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 +0% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) on Tuesday closed up +60.50 (+1.51%), and September COMEX silver (SIU26) closed up +2.036 (+3.57%).

Gold and silver prices rose sharply on Tuesday.  Precious metals have safe-haven support today on escalation of hostilities between the US and Iran, as both countries exchanged strikes for a tenth consecutive day. President Trump said on Tuesday that the US has "no interest" in meeting with Iran until they are ready for serious peace negotiations.  Also, concerns that the conflict could widen are supporting 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.  Silver prices also garnered carryover support from Tuesday's rally in copper prices to a 1-month high after China's Shanghai copper inventories dropped to a 10.5-month low. 

Tuesday's dollar strength was bearish for precious metals prices.  Also, higher global bond yields on Tuesday were negative for precious metals. In addition, Tuesday's +2% increase in crude oil prices to a 5-week high raised inflation expectations and could prompt the world's central banks to tighten monetary policy, a bearish factor for precious metals.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.75-month low on Monday, 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, 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.