Dollar Weakens as Stocks Recover and US Consumer Sentiment Falls

The dollar index (DXY00) today is down by -0.23%.  The dollar today is moderately lower and holding above Thursday’s 1-month low.  A rebound in stocks today from Thursday’s losses has curbed liquidity demand for the dollar.  The dollar was also undercut after the University of Michigan’s US consumer sentiment index unexpectedly fell to an 8-month low.  The dollar has carryover pressure from Thursday’s weaker than expected US CPI report, which boosted the chances for a Fed rate cut at the September FOMC meeting. A supportive factor for the dollar was today’s stronger than expected US PPI report, a hawkish factor for Fed policy. 

The US Jun PPI final demand rose +0.2% m/m and +2.6% y/y, stronger than expectations of +0.1% m/m and +2.3% y/y, with the +2.6% y/y gain being the largest year-on-year increase in 15 months. Jun PPI ex-food and energy rose +0.4% m/m and +3.0% y/y, stronger than expectations of +0.2% m/m and +2.5% y/y, with the +3.0% y/y gain being the largest year-on-year increase in 14 months.

The University of Michigan’s US July consumer sentiment index unexpectedly fell -2.2 to an 8-month low of 66.0, weaker than expectations of an increase to 68.5.

The markets are discounting the chances for a -25 bp rate cut at 5% for the July 30-31 FOMC meeting 

and 99% for the following meeting on Sep 17-18.

EUR/USD (^EURUSD) today is up by +0.27% and posted a 5-week high. The euro today is moderately higher on weakness in the dollar.  Also, strength in 10-year German bund yields today have strengthened the euro’s interest rate differentials. 

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 5% for the July 18 meeting and 81% for the September 12 meeting.

USD/JPY (^USDJPY) today is down by -0.66%.  The yen today added to Thursday’s gains and rose to a 3-week high against the dollar.  The yen is supported today on signs the BOJ intervened in the forex market on Thursday in support of the yen.  Also, an upward revision today to Japan’s May industrial production is positive for the yen.

Japan May industrial production was revised upward to +3.6% m/m from the previously reported +2.8% m/m.

According to a Bloomberg analysis of central bank accounts, the BOJ spent around 3.5 trillion yen ($22 billion) when it intervened in the forex market Thursday is support of the yen.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 50% for the July 31 meeting and 37eur% for the September 20 meeting.

August gold (g[po) today is down -7.60 (-0.31%), and September silver (SIU24) is down -0.586 (-1.85.  Today’s US June PPI report was stronger than expectations and weighed on precious metals prices.  However, a weaker dollar and lower T-note yields today are limiting losses in precious metals. 

Precious metals prices today recovered from their worst levels after the University of Michigan’s US consumer sentiment index unexpectedly fell to an 8-month low, a dovish factor for Fed policy.  Gold also has support from fund buying after long gold holdings in ETFs rose to a 3-month high Thursday.

• CPI Report Indicating Lower Inflation: What to Buy and What to Sell?
• Dollar Falls as Dovish US CPI Report Bolsters Rate Cut Hopes
• Dollar Sinks as Weak US CPI Report Puts Rate Cuts in Play
• Dollar Slightly Lower Ahead of US Jun CPI Report

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