The dollar index (DXY00) Friday rose slightly by +0.07%.  The dollar saw support from hawkish Fed comments and negative inflation news, which sparked a +4.9 bp rise in the 10-year T-note yield to 4.502% and reduced Fed rate-cut expectations.

Hawkish Fed comments Friday boosted T-note yields and supported the dollar.  Fed Governor Michelle Bowman said Friday the Fed must maintain its inflation credibility “by proceeding carefully and deliberately to achieve our 2% goal.”  She said the Fed needs to keep rates where they are “for a bit longer.”  Also, Atlanta Fed President Raphael Bostic told Reuters in an interview that he expects only one 25 bp rate cut this year, coming late in the year.  Dallas Fed President Lorie Logan said, “It’s just too early to think about cutting rates.” Minneapolis Fed President Neel Kashkari said the Fed is in a wait and see mode to see if inflation is stalling. He also said he does not rule out the need for another rate hike although he said there would be a high bar for such a decision.  On the less hawkish side, Chicago Fed President Austan Goolsbee said there isn’t much evidence that inflation is stalling out as high as 3%.

The markets are discounting the chances for a -25 bp rate cut at 5% for the June 11-12 FOMC meeting and 27% for the following meeting on July 30-31, down from Thursday’s levels of 10% and 36%, respectively.

The dollar was undercut by negative US economic news.  The University of Michigan’s preliminary-May US consumer sentiment index fell -9.8 points to a 6-month low of 67.4, which was weaker than market expectations for a -1.0 point decline to 76.2. 

However, the University of Michigan’s report also showed that US consumer inflation expectations rose, which was hawkish for Fed policy and supportive for the dollar.  The University of Michigan’s May US 1-year inflation expectation indicator rose by +0.3 points to 3.5% from April’s 3.2% and was stronger than expectations of unchanged at 3.2%.  Also, the May 5-10 year inflation expectation indicator rose to +3.1% from April’s 3.0%.

EUR/USD (^EURUSD) fell slightly by -0.06%.  The euro was undercut by the stronger dollar and expectations that the ECB will cut rates much sooner than the Fed. 

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 94% for its next meeting on June 6.

USD/JPY (^USDJPY) rose by +0.21%.  The yen continues to be undercut by speculation that Japanese authorities won’t intervene again in the forex market anytime soon to support the yen after Masato Kanda, Japan’s top currency official, said Tuesday that the government doesn’t need to intervene in the forex market if market movements are orderly. 

The yen saw carry-over support from Thursday’s summary of the April 25-26 BOJ meeting, which showed BOJ board members were considering the potential for faster rate hikes if the weak yen worsened the inflation outlook.  The summary said, "If underlying inflation continues to deviate upward from the baseline scenario against the backdrop of a weaker yen, it is quite possible that the pace of monetary policy normalization will increase."

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 34% for the June 14 meeting.

June gold (GCM4) Friday closed up +34.70 (+1.48%), and July silver (SIN24) closed up +0.141 (+0.50%).  Precious metals prices saw support from Friday’s dovish US consumer sentiment report and ongoing Middle East tensions.  Precious metals prices also gained support as an inflation hedge after the University of Michigan’s report showed an increase in US consumer inflation expectations.

Precious metals were undercut Friday by higher T-note yields and a slightly stronger dollar.  Fund liquidation of gold holdings is negative for gold prices after long gold holdings in ETFs fell to a 4-1/2 year low Thursday. 

• Are the Gold and Silver Corrections a Compelling Buying Opportunity?
• Dollar Sees Support from Hawkish Fed Comments
• Dollar Softens and Gold Rallies as US Jobless Claims Climb
• 1 Cheap Gold Mining Stock to Scoop Up Now