Dollar Climbs to 13-Month High as Hawkish Fed Outlook Pressures Gold

The dollar index (DXY00) rose 0.80% on Thursday, reaching its highest level in 13 months. The greenback built on momentum from Wednesday, when the Federal Open Market Committee projected higher interest rates later this year. Additional U.S. data also supported the dollar, as weekly jobless claims fell in line with expectations and the June Philadelphia Fed business outlook survey improved more than forecast.

The dollar faced some headwinds from lower WTI crude oil prices, which fell to a 3.5-month low. The decline in oil reduced inflation expectations and raised the possibility that the Federal Reserve could eventually adopt a more accommodative policy stance. A rally in U.S. equities also reduced liquidity demand for the dollar.

U.S. weekly initial unemployment claims fell by 4,000 to 226,000, close to expectations of 225,000.

The June Philadelphia Fed business outlook survey advanced to 10.3, stronger than the expected reading of 10.0.

U.S. May leading indicators rose 0.1% month over month, matching expectations.

Swaps markets are pricing a 36% probability of a 25-basis-point rate cut at the Fed’s next policy meeting on July 28-29.

EUR/USD (^EURUSD) fell 0.40% on Thursday, dropping to a 2.5-month low as the stronger dollar weighed on the euro. Losses were limited by hawkish comments from ECB Governing Council member Martin Kocher, who said the European Central Bank is prepared to act at any time to bring inflation back to its 2% target. Lower crude oil prices also supported the euro, as the Eurozone imports most of its energy.

Kocher said consumer prices in the Eurozone are likely to remain elevated for some time, despite the agreement to end the war in the Middle East, and reiterated that the ECB stands ready to ensure inflation returns to its 2% target.

Markets are pricing a 17% chance of a 25-basis-point ECB rate hike at its next policy meeting on July 23.

USD/JPY (^USDJPY) rose 0.67% on Thursday, while the yen weakened to a 23-month low against the dollar. The yen came under pressure as the dollar strengthened after the Fed’s hawkish stance on Wednesday. A rally in Japan’s Nikkei Stock Index to a fresh record high also reduced safe-haven demand for the yen.

The yen received some support from falling crude oil prices, which are beneficial for Japan’s economy because the country imports more than 90% of its energy. With the yen trading above 160 per dollar, intervention risks have increased, as Japanese authorities have stepped into the foreign exchange market several times in the past when the currency approached that level.

Markets are pricing a 2% chance of a 25-basis-point Bank of Japan rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) settled down $135.50, or 3.09%, while July COMEX silver (SIN26) fell $4.448, or 6.29%.

Precious metals dropped sharply on Thursday as the stronger dollar and the Fed’s hawkish interest-rate outlook pressured prices. Gold and silver also faced negative carryover from Wednesday’s FOMC projections for higher rates later this year. In addition, President Trump’s late-Wednesday signing of a preliminary agreement to end the war in the Middle East helped fuel a stock-market rally, reducing safe-haven demand for precious metals.

Lower crude oil prices offered some support to gold and silver by reducing inflation expectations and raising the possibility that central banks could pursue easier monetary policies.

Recent fund liquidation has been bearish for precious metals. Long holdings in gold ETFs fell to a 7.25-month low on Wednesday after reaching a 3.5-year high on February 27. Long holdings in silver ETFs also declined to a 10.5-month low on Monday from a 3.5-year high recorded on December 23.

Central bank demand remains supportive for gold. China’s PBOC increased its gold reserves by 320,000 ounces in May to 74.96 million troy ounces, the largest monthly gain in 17 months and the nineteenth straight month of increases.

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