Dollar Finds Support from Higher Bond Yields

Rich Asplund - Barchart - Fri May 17, 9:37AM CDT

The dollar index (DXY00) today is up by +0.12%. Higher T-note yields today are supportive of the dollar. The dollar also garnered some support today from mixed economic news from China, which showed that China’s ongoing housing crisis is undercutting consumer spending. The dollar fell back from its best levels today after US Apr leading indicators fell by the most in 6 months. Also, dovish comments from Atlanta Fed President Bostic are limiting the upside in the dollar.

US Apr leading indicators fell -0.6% m/m, weaker than expectations of -0.3% m/m and the biggest decline in 6 months.

Thursday evening, Atlanta Fed President Bostic said if the outlook unfolds as he expects, referring to slowly moderating inflation and continued economic momentum, "then it could be appropriate for us to reduce rates toward the end of the year."

The markets are discounting the chances for a -25 bp rate cut at 10% for the June 11-12 FOMC meeting and 32% for the following meeting on July 30-31.

EUR/USD (^EURUSD) today is down by -0.06%. The euro today is being undercut by a stronger dollar. Also, central bank divergence is weighing on the euro as the ECB is expected to cut interest rates next month while the Fed continues to delay rate cuts. Hawkish comments today from ECB Executive Board member Schnabel pushed German bund yields higher and limited losses in the euro.

ECB Executive Board member Schnabel warned against back-to-back interest-rate cuts in June and July and said, "Based on current data, a rate cut in July does not seem warranted."

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 96% for its next meeting on June 6.

USD/JPY (^USDJPY) today is up by +0.18%. The yen is under pressure today from higher T-note yields. The yen also fell back after the BOJ left its bond purchase amounts unchanged today, following a surprise cut in its monthly bond buying on Monday.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 24% for the June 14 meeting.

June gold (GCM4) today is up +20.6 (+0.86%), and July silver (SIN24) is up +0.849 (+2.84%). Precious metals prices today are moderately higher, with gold climbing to a 1-month high and July silver posting a contract high. Also, nearest-futures May silver posted an 11-year high.

Dovish comments Thursday evening from Atlanta Fed President Bostic gave precious metals a boost when he said it may be appropriate to cut interest rates toward the end of the year should the economy evolve as he anticipates. Silver has support from the outlook for increased industrial demand. The World Silver Survey said industrial consumption of silver hit an all-time high in 2023 and is expected to expand another 9% this year, driven by clean-energy applications such as solar panels.

On the negative side for precious metals is today’s strength in the dollar. Also, higher global bond yields today are bearish for precious metals. In addition, hawkish comments today from ECB Executive Board member Schnabel undercut precious metals when she said back-to-back interest rate cuts by the ECB in June and July don’t look warranted.

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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.