Dollar Firms on Higher US T-Note Yields

Rich Asplund - Barchart - Thu May 16, 9:45AM CDT

The dollar index (DXY00) dollar today recovered from an early 5-week low and is up +0.25%. The dollar is seeing support from a rebound in T-note yields. Today’s US economic reports were mixed for the dollar. The dollar was undercut by dovish comments from New York Fed President Williams, who said he doesn't "see any need to tighten monetary policy today."

US weekly initial unemployment claims fell -10,000 to 222,000, showing a weaker labor market than expectations of 220,000.

US Apr housing starts rose +5.7% m/m to 1.36 million, weaker than expectations of 1.421 million. Apr building permits (a proxy for future construction) unexpectedly fell -3.0% m/m to a 15-month low of 1.44 million, weaker than expectations of 1.48 million.

The US May Philadelphia Fed business outlook survey fell -11.0 to 4.5, weaker than expectations of 7.8.

The US Apr import price index ex-petroleum rose +0.7% m/m, stronger than expectations of +0.1% m/m and the largest increase in 16 months.

US Apr manufacturing production unexpectedly fell -0.3% m/m, weaker than expectations of +0.1% m/m.

New York Fed President Williams said the softer tone of April's CPI is "kind of a positive development" and "the overall trend looks reasonably good" for a gradual slowdown in inflation pressures. He added that monetary policy is "restrictive" and "is in a good place," and he doesn't "see any need to tighten monetary policy today."

The markets are discounting the chances for a -25 bp rate cut at 10% for the June 11-12 FOMC meeting and 34% for the following meeting on July 30-31.

EUR/USD (^EURUSD) today is down by -0.25%. The euro today fell back from a 1-3/4 month high and is mildly lower on dovish comments from ECB Governing Council members Centeno and de Cos. Also, a rebound in the dollar today sparked long liquidation in the euro.

ECB Governing Council member de Cos said the "central scenario" is for an interest-rate reduction by the ECB at its next meeting on June 6.

ECB Governing Council member Centeno said he sees the ECB on a path of interest rate reductions for "some time."

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 +0.34%. The yen is under pressure today after Q1 Japan's GDP contracted more than expected. Also, higher T-note yields today are undercutting the yen. Losses in the yen are limited after the Japan’s Q1 GDP deflator rose more than expected and Japan’s Mar industrial production was revised higher, hawkish factors for BOJ policy.

Japan's Q1 GDP fell -2.0% (q/q annualized), weaker than expectations of -1.2%. The Q1 GDP deflator rose +3.6% y/y, stronger than expectations of +3.3% y/y.

Japan Mar industrial production was revised upward to +4.4% m/m from the previously reported +3.8% m/m.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 20% for the June 14 meeting.

June gold (GCM4) this morning is down -16.0 (-0.67%), and July silver (SIN24) is down -0.014 (-0.05%). Precious metals prices today gave up an early advance and are moving lower. Gold prices fell back from a 3-week high and silver retreated from a 5-week high as a stronger dollar sparked long liquidation in metals. Also, higher global bond yields today are bearish for precious metals. Silver was undercut by today’s weaker-than-expected US Apr housing starts and building permits reports and the steeper-than-expected contraction in Japan's Q1 GDP, negative factors for industrial metals demand.

On the bullish side, gold has support on increased demand as an inflation hedge after the US Apr import price index ex-petroleum posted its largest increase in 16 months. Also, dovish central bank comments were supportive of precious metals as a store of value. New York Fed President Williams said he doesn't "see any need to tighten monetary policy today." In addition, ECB Governing Council member Centeno said he sees the ECB on a path of interest rate reductions for "some time."

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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.