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Dollar Falls on Lower Bond Yields and Strength in Stocks

Barchart - Thu Jun 1, 2:42PM CDT

The dollar index (DXY00) on Thursday fell -0.74% and posted a 1-week low.  A decline in T-note yields Thursday undercut the dollar.  The dollar also came under pressure after the May ISM manufacturing index contracted more than expected, which was dovish for Fed policy.  In addition, the action by the House to pass the debt ceiling agreement sparked a rally in stocks that curbed the liquidity demand for the dollar. 

Thursday’s U.S. economic news was mixed for the dollar.  On the bearish side, the May ISM manufacturing index fell -0.2 to 46.9, slightly weaker than expectations of 47.0.  Also, the May ISM prices paid sub-index fell -9.0 to a 5-month low of 44.2, a bigger decline than expectations of 52.3.  On the bullish side, May ADP employment change rose +278,000, stronger than expectations of +170,000.  Also, weekly initial unemployment claims rose +2,000 to 232,000, showing a stronger labor market than expectations of 235,000.

Comments Thursday from Philadelphia Fed President Harker signaled his support for pausing Fed rate hikes and were bearish for the dollar when he said, "I do believe that we are close to the point where we can hold rates in place and let monetary policy do its work to  bring inflation back to the target in a timely manner."

EUR/USD (^EURUSD) on Thursday rose by +0.67% and posted a 1-week high.  The euro Thursday recovered from early losses and moved higher on hawkish comments today from ECB President Lagarde, who said, "There is no clear evidence that underlying inflation in the Eurozone has peaked.”  EUR/USD Thursday initially moved lower after Thursday’s Eurozone May CPI report showed a smaller-than-expected increase in Eurozone May CPI, which is dovish for ECB policy.

ECB President Lagarde said, "There is no clear evidence that underlying inflation in the Eurozone has peaked.  We have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels."

Eurozone May CPI eased to +6.1% y/y from +7.0% y/y in Apr, weaker than expectations of +6.3% y/y and the smallest increase in 15 months.  Also, May core CPI eased to +5.3% y/y from +5.6% y/y in Apr, weaker than expectations of +5.5% y/y.

The Eurozone May S&P manufacturing PMI was revised upward by +0.2 to 44.8 from the initially reported 44.6.

The Eurozone Apr unemployment rate fell -0.1 to a record low 6.5% (data from 1998), right on expectations.

German Apr retail sales rose +0.8 m/m, the biggest increase in 5 months.

USD/JPY (^USDJPY) on Thursday fell by -0.39% and has declined every day this week.  The yen posted a 1-week high against the dollar Thursday after the 10-year T-note yield dropped to a 2-week low.  Also, better-than-expected Japanese economic news Thursday was supportive for the yen after Q1 capital spending ex-software posted its largest increase in nearly five years. 

The Japan May Jibun Bank manufacturing PMI was revised downward by -0.2 to 50.6 from the initially reported 50.8.

Japan's Q1 capital spending ex-software rose +10.0% y/y, stronger than expectations of +3.7% y/y and the biggest increase in 4-3/4 years.

August gold (GCQ3) on Thursday closed up +13.40 (+0.68%), and July silver (SIN23) closed up +0.400 (+1.70%).  Precious metals Thursday rallied to 1-week highs and settled moderately higher.   Weakness in the dollar is bullish for metals as the dollar index Thursday fell to a 1-week low.  Precious metal also found support Thursday from lower global bond yields.  Metals maintained moderate gains on dovish comments from Philadelphia Fed President Harker, who signaled his support for pausing Fed rate hikes. 

However, precious metals prices were undercut by Thursday’s stronger-than-expected ADP employment report and the smaller-than-expected increase in weekly jobless claims, which were hawkish factors for Fed policy.  Also, safe-haven demand for precious metals eased after the House passed an agreement to suspend the debt ceiling.

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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.