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Liquidity Demand Boosts Dollar as Stocks Decline

Barchart - Thu May 4, 2:31PM CDT

The dollar index (DXY00) on Thursday rose by +0.06%.  The dollar Thursday recovered from a 1-week low and posted modest gains.  Weakness in stocks Thursday sparked liquidity demand for the dollar.  The dollar Thursday initially fell after U.S economic news showed a wider-than-expected U.S Mar trade deficit and after Q1 nonfarm productivity fell more than expected. 

Thursday’s U.S. economic news was bearish for the dollar.  Weekly initial unemployment claims rose +13,000 to 242,000, showing a weaker labor market than expectations of 240,000.  Also, Q1 nonfarm productivity fell -2.7%, weaker than expectations of -2.0%.  In addition, the Mar trade deficit was -$64.2 billion, wider than expectations of -$63.1 billion.

EUR/USD (^EURUSD) on Thursday fell by -0.42%.  Thursday’s Eurozone economic news weighed on the euro after Eurozone Mar producer prices eased to their slowest pace of increase in 2 years, a dovish factor for ECB policy. Also, Eurozone Apr composite PMI was revised downward, and German Mar exports fell more than expected.  The euro maintained moderate losses despite the ECB raising interest rates by 25 bp and hawkish comments from ECB President Lagarde. 

The ECB, as expected, raised the deposit facility rate by +25 bp to 3.25% and said, "The inflation outlook continues to be too high for too long."  The ECB said that future rate decisions will make rates sufficiently restrictive and will be based on the inflation outlook.  Also, the ECB said it expects to halt reinvestments under its Asset Purchase Program as of July.

ECB President Lagarde said, "We have more ground to cover, and we are not pausing" on interest rate hikes.  "That's extremely clear."  Wage pressures have strengthened further, and the inflation outlook has "upside risks."

Eurozone Mar PPI eased to +5.9% y/y from +13.3% y/y in Feb, the slowest pace of increase in 2 years.

The Eurozone Apr composite PMI was revised downward by -0.3 to 54.1 from the initially reported 54.4.

German trade data was weaker than expected after German Mar exports fell -5.2% m/m, weaker than expectations of -2.2% m/m.  Also, Mar imports fell -6.4% m/m, weaker than expectations of -2.1% m/m and the biggest decline in nearly three years.

USD/JPY (^USDJPY) on Thursday fell by -0.42%.  The yen Thursday strengthened as concerns about the health of the U.S. banking sector have sparked safe-haven demand for the yen. Also, lower T-note yields are supportive of the yen.  However, trading activity in the yen was muted, with Japanese markets closed Thursday for the Greenery Day holiday.

June gold (GCM3) on Thursday closed up +18.70 (+0.92%), and July silver (SIN23) closed up +0.546 (+2.13%).  Precious metals Thursday moved higher, with gold posting a 14-month high and silver climbing to a 1-year high.  Speculation that the Fed is nearing the end of its interest-rate hiking campaign is a bullish factor for metals.  Also, concern about the health of the U.S. banking system is fueling demand for precious metals as a safe haven.  A decline in global bond yields Thursday was also supportive for precious metals.

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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.

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