US Dollar Hits 13-Month High as Hawkish Fed Outlook Weighs on Gold and Major Currencies

The US dollar index (DXY00) rose 0.26% today, extending a week-long rally to reach a new 13-month peak. The currency continues to benefit from the FOMC’s hawkish stance established last Wednesday, which projected higher interest rates for the remainder of the year. The dollar’s ascent saw a slight tempering following reports that May new home sales unexpectedly dropped to a four-month low.

The US Q1 current account balance stood at -$225.8 billion, a wider deficit than the -$208.9 billion analysts had anticipated.

Specifically, US May new home sales fell 7.3% month-over-month to 580,000, missing expectations of an increase to 640,000. Currently, swaps markets are pricing in a 32% probability of a 25 basis point rate hike at the next FOMC meeting scheduled for July 28-29.

The EUR/USD (^EURUSD) pair dropped 0.31% to a fresh one-year low, pressured by the dollar’s dominance and dovish signals from ECB President Christine Lagarde. Lagarde’s recent comments suggesting no need for a forceful response to the US-Iran conflict have diminished expectations for further ECB rate hikes. Conversely, Eurozone fundamentals provided some support as the German IFO business confidence index rose to 85.6, slightly beating the expected 85.5. Markets are currently pricing in a 7% chance of a 25 basis point hike at the ECB’s July 23 meeting.

USD/JPY (^USDJPY) gained 0.11%, with the yen trading just above its 23-month low. The yen remains under pressure due to concerns that the Bank of Japan (BOJ) is lagging in its monetary policy normalization. This sentiment was reinforced by BOJ Deputy Governor Uchida, who indicated that policy tightening will proceed at a gradual pace to assess economic impacts.

However, losses were partially offset by hawkish remarks from BOJ Governor Kazuo Ueda, who stated that since underlying inflation is nearing 2% and financial conditions remain accommodative, the bank expects to continue raising interest rates in response to economic activity and price trends.

Risks of currency intervention are intensifying. Japanese Finance Minister Satsuki Katayama reported that she and US Treasury Secretary Scott Bessent agreed on Tuesday to take “bold” steps if necessary, noting a closer alignment on foreign-exchange policy. With the yen trading above 160 per dollar, the likelihood of intervention increases, as Japanese authorities have historically stepped in at this threshold.

Japan’s May PPI services prices remained unchanged from April at +3.3% year-over-year, meeting expectations and marking a 14-month high. Markets currently estimate a 2% chance of a 25 basis point BOJ rate hike at the July 31 meeting.

In the metals market, August COMEX gold (GCQ26) fell by 113.10 (-2.73%) and July COMEX silver (SIN26) dropped 2.955 (-4.76%). Gold has plunged to a 7.5-month low, while silver has hit a 6.5-month low. This decline is driven by the dollar’s rally and the liquidation of long positions following the FOMC’s signal of higher rates.

Precious metals found modest support from a slide in WTI crude oil prices to a 3.5-month low, which tempered inflation expectations and potentially opens the door for central bank easing. Additionally, political instability in the UK—following Keir Starmer’s announcement that he would step down as prime minister—has spurred some safe-haven demand.

Bearish sentiment is further reinforced by fund liquidations; gold ETF long holdings fell to a 7.5-month low last Wednesday, and silver ETF holdings hit an 11-month low last Friday.

Despite this, strong central bank accumulation continues to provide a floor for gold. China’s PBOC reserves increased by 320,000 ounces in May to reach 74.96 million troy ounces, marking the largest monthly increase in 17 months and the nineteenth consecutive month of gold accumulation by the PBOC.

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