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Dollar Gains on Yuan Weakness and a Slide in Stocks

Barchart - Wed May 31, 3:04PM CDT

The dollar index (DXY00) on Wednesday rose +0.14% and posted a 2-1/2 month high. The dollar saw support Wednesday as weakness in stocks boosted the liquidity demand for the dollar.  However, dovish comments from Fed Governor Jefferson and Philadelphia Fed President Harker tempered the dollar’s rally when they signaled support for pausing Fed rate hikes.  The Chinese yuan on Wednesday fell to a 6-month low against the dollar on weaker-than-expected Chinese economic news.

Tuesday’s U.S. economic news was mixed for the dollar.  On the bullish side, Apr JOLTS job openings unexpectedly rose +358,000 to 10.103 million, showing a stronger labor market than expectations of a decline to 9.400 million.  Conversely, the May MNI Chicago PMI fell -8.2 to 40.4, weaker than expectations of 47.3 and the steepest pace of contraction in 6 months.

The Fed Beige Book was neutral for the dollar as it said economic activity was little changed overall in April and early May and that employment increased at a slower pace and price increases slowed in many Fed districts.

Fed comments Wednesday were mixed for the dollar.  On the hawkish side, Cleveland Fed President Mester said the Fed needs to go further with its interest rate hikes, and she "doesn't see a compelling reason to pause."  On the dovish side, Fed Governor Jefferson said the Fed is inclined to keep interest rates steady at the next FOMC meeting, but "that should not be interpreted to mean that the Fed has reached the peak rate for this cycle." Also, Philadelphia Fed President Harker said, "I am definitely in the camp of thinking about skipping any interest rate increase" at the next FOMC meeting.

EUR/USD (^EURUSD) on Wednesday fell by -0.56% and posted a 2-1/4 month low.  The euro retreated Wednesday due to weaker-than-expected French and German May CPI reports, which were dovish for ECB policy.  Also, a decline in the 10-year German bund yield to a 2-1/2 week low Wednesday weakened the euro’s interest rate differentials.

German May CPI (EU harmonized) eased to +6.3% y/y from +7.6% y/y in Apr, better than expectations of +6.7% y/y and the weakest level in 15 months.

The German Apr import price index fell -7.0% y/y, the most in 3 years, and a larger decline than expectations of -5.8% y/y.

France May CPI (EU harmonized) eased to +6.0% y/y from +6.9% y/y in Apr, better than expectations of +6.4% y/y and the smallest increase in a year.

France Apr consumer spending unexpectedly fell -1.0% m/m, the third straight decline and weaker than expectations of a +0.3% m/m increase.

USD/JPY (^USDJPY) on Wednesday fell by -0.35%.  The yen recovered from early losses and strengthened Wednesday on a decline in T-note yields.  Also, a slump in stocks Wednesday boosted the safe-haven demand for the yen.  Finally, a jump in the Japan May consumer confidence index Wednesday to a 16-month high was supportive of the yen.  The yen Wednesday initially moved lower on the weaker-than-expected Japanese industrial production and retail sales reports.

The Japan May consumer confidence index rose +0.6 to a 16-month high of 36.0, right on expectations.

Japan Apr industrial production unexpectedly fell -0.4% m/m, weaker than expectations of a +1.4% m/m increase.

Japan Apr retail sales unexpectedly fell -1.2% m/m, the biggest decline in 16 months and weaker than expectations of a +0.5% m/m increase.

June gold (GCM3) on Wednesday closed up +5.90 (+0.30%), and July silver (SIN23) closed up +0.348 (+1.50%).  Precious metals Wednesday posted moderate gains, with silver climbing to a 1-week high. A slump in stocks Wednesday boosted the safe-haven demand for precious metals.  Also, lower global bond yields Wednesday were bullish for metals. However, gains in metals were limited after the dollar rallied to a 2-1/2 month high.  Also, silver prices are under pressure on global demand concerns for industrial metals after the China May manufacturing PMI unexpectedly contracted by the most in 5 months and after the U.S. May MNI Chicago PMI contracted by the steepest pace in 6 months.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.