Dollar Drops as Crude Oil Prices Fall, Softening Rate‑Hike Fears

The DXY00 dollar index slipped 0.07% on Friday. The decline followed weaker crude oil prices, with WTI falling over 3% to a four‑month low, easing inflation concerns and potentially prompting the Fed to consider looser monetary policy, which weighed on the dollar. The drop coincided with a weaker‑than‑expected June consumer sentiment reading from the University of Michigan.

The dollar rebounded from its lowest point on Friday after hawkish remarks from Minneapolis Fed President Neel Kashkari, who expressed inflation worries and advocated for a rate increase later this year.

U.S. wholesale inventories rose 0.3% month‑over‑month in May, falling short of the 0.4% consensus, while retail inventories increased 0.6% month‑over‑month, exceeding the 0.5% forecast.

The University of Michigan’s June consumer sentiment index was revised up 0.6 points to 49.5, still below the 50.0 consensus estimate.

One‑year inflation expectations remained steady at 4.6% in June, while five‑ to ten‑year expectations fell 0.1 percentage point to 3.3%, matching market forecasts.

Swaps markets currently assign a 30% probability to a 25‑basis‑point rate cut at the upcoming FOMC meeting on July 28‑29.

EUR/USD edged up 0.12% on Friday as the weaker dollar bolstered the euro. The 3% drop in crude oil prices is supportive of the eurozone economy, given Europe’s reliance on energy imports. The ECB’s inflation expectations report showed a mixed outlook for the euro, with short‑term expectations declining while long‑term expectations held steady.

In May, ECB one‑year CPI expectations slipped to 3.5% from 4.0% in April, undercutting the 3.9% forecast. Three‑year CPI expectations stayed at 2.9%, slightly above the 2.8% consensus.

Market participants assign roughly a 7% probability to a 25‑basis‑point rate hike by the ECB at its July 23 policy meeting.

USD/JPY slipped 0.04% on Friday, with the yen strengthening after June Tokyo CPI data came in above expectations, a bullish signal for BOJ policy. The 3% decline in crude oil prices benefits Japan’s economy and the yen, as the nation imports over 90% of its energy. Additionally, the 4% drop in the Nikkei index heightened safe‑haven demand for the yen.

The yen remains pressured, trading just above Thursday’s 39‑year low against the dollar, as concerns grow that the BOJ is lagging in monetary‑policy normalization. Last week, Deputy Governor Uchida indicated the BOJ will evaluate the effects of rate hikes and move cautiously, suggesting a slow‑pace approach.

Intervention risks for the yen are rising after Finance Minister Satsuki Katayama said she discussed the issue with Treasury Secretary Scott Bessent on Tuesday, agreeing to take bold action if needed and noting growing alignment on foreign‑exchange policy. With the yen trading above 160 per dollar, the likelihood of market intervention has increased, recalling past interventions when the yen approached this level.

June Tokyo CPI rose 1.7% year‑over‑year, beating the 1.6% forecast, while the core CPI—excluding food and energy—climbed 1.9% year‑over‑year, surpassing the 1.8% expectation.

Swaps markets price in a 1% probability of a 25‑basis‑point BOJ rate hike at the July 31 policy meeting.

August COMEX gold (GCQ26) finished Friday up 48.70 points, or 1.20%, while July COMEX silver (SIN26) rose 0.863 points, or 1.48%.

Gold and silver ended Friday sharply higher, buoyed by a softer dollar. The 3% plunge in crude oil prices lowered inflation expectations, potentially prompting central banks to adopt looser monetary stances—a bullish signal for precious metals. Meanwhile, equity market weakness sparked safe‑haven demand, though prices pulled back from earlier peaks after Minneapolis Fed President Neel Kashkari expressed support for a rate increase later this year, dampening the outlook.

Recent fund liquidations have weighed on precious metals, with long positions in gold ETFs dropping to a 7.5‑month low on Wednesday after hitting a 3.5‑year high on February 27. Similarly, long silver ETF positions fell to an 11‑month low on Thursday, down from the 3.5‑year high reached on December 23.

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