US Dollar Hits 13-Month High as Hawkish Fed Sentiment Pressures Gold and Yen

Pile of money by Atlantagreg via iStock

The US Dollar Index (DXY) climbed 0.80% on Thursday, reaching a 13-month peak. This rally was fueled by continued momentum from the FOMC’s projections of higher interest rates later this year, as well as supportive domestic economic data. Weekly jobless claims fell to 226,000, aligning with expectations, while the June Philadelphia Fed business outlook survey outperformed forecasts, rising to 10.3. US leading indicators for May also rose by 0.1%, meeting market expectations.

Counteracting these gains, WTI crude oil prices dropped to a 3.5-month low, which lowered inflation expectations and potentially opened the door for easier monetary policy. Additionally, a rally in the stock market reduced the immediate liquidity demand for the dollar. Current swaps markets place the probability of a 25 basis point rate cut at the July 28-29 FOMC meeting at 36%.

The EUR/USD pair fell 0.40% to a 2.5-month low, primarily driven by the dollar’s strength. However, losses were mitigated by hawkish remarks from ECB Governing Council member Martin Kocher, who emphasized the ECB’s readiness to act to ensure inflation returns to its 2% target. The decline in crude oil prices also provided a boost to the euro, as lower energy import costs benefit the Eurozone economy. Markets currently estimate a 17% chance of a 25 basis point rate hike by the ECB at its July 23 meeting.

The USD/JPY rose 0.67%, pushing the yen to a 23-month low. The decline was driven by the Fed’s hawkish outlook and a record-breaking rally in the Nikkei Stock Index, which reduced safe-haven demand for the yen. While falling oil prices provided some support for Japan’s energy-dependent economy, the yen remains under pressure. With the exchange rate firmly above 160 per dollar, the risk of intervention from Japanese authorities has increased. Markets see a minimal 2% chance of a BOJ rate hike at the July 31 meeting.

Precious metals saw significant declines, with August COMEX gold closing down 3.09% (-$135.50) and July COMEX silver dropping 6.29% (-$4.448). The sell-off was triggered by the surging US dollar and the FOMC’s rate projections. Furthermore, a preliminary deal to end the conflict in the Middle East sparked an equity rally, further eroding the safe-haven appeal of gold and silver.

While falling oil prices typically support precious metals by lowering inflation expectations, this was offset by recent fund liquidations. Long positions in gold ETFs dropped to a 7.25-month low on Wednesday, while silver ETF holdings hit a 10.5-month low on Monday. Despite this, central bank demand remains a key support pillar; China’s PBOC increased its gold reserves by 320,000 ounces in May to 74.96 million troy ounces, marking the nineteenth consecutive month of accumulation.

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