The dollar index (DXY00) on Wednesday rose slightly by +0.03%.  The dollar saw support from concern that US tariffs will boost inflation and prevent the Fed from cutting interest rates.  Also, the minutes of the June 17-18 FOMC meeting were slightly hawkish and supportive of the dollar.  Gains in the dollar were limited by strength in stocks, which reduced liquidity demand for the dollar. 

The dollar also had support from some flight-to-safety demand after President Trump vowed to push forward with his aggressive tariff regime, stressing that he would not offer additional extensions on country-specific tariffs set to take effect on August 1.  In addition, despite stating that the US was close to a trade deal with India, Mr. Trump said he would still impose a 10% tariff on India’s goods for their participation in BRICS, a group of developing nations he claimed were “set up to hurt” the US.   

The minutes of the June 17-18 FOMC meeting were slightly hawkish as they stated that, “While a few participants noted that tariffs would lead to a one-time increase in prices and would not affect longer-term inflation expectations, most participants noted the risk that tariffs could have more persistent effects on inflation.”

The markets are discounting a 5% chance of a -25 bp rate cut at the July 29-30 FOMC meeting.

EUR/USD (^EURUSD) on Wednesday fell by -0.04%.  The euro was under modest pressure Wednesday from a stronger dollar.  Also, lower German bund yields on Wednesday weighed on the euro.

Losses in the euro are limited by hawkish comments from ECB Governing Council member Holzmann, who said, “There’s no reason at the moment why the ECB should cut interest rates, definitely not at the next meeting, and also for the rest of the year.”

Swaps are pricing in a 3% chance of a -25 bp rate cut by the ECB at the July 24 policy meeting.

USD/JPY (^USDJPY) on Wednesday fell by -0.19%.  The yen recovered from a 2-week low against the dollar Wednesday and moved higher after the 10-year Japan JGB bond yield climbed to a 5-week high of 1.51%, which strengthened the yen’s interest rate differentials.  Also, lower T-note yields on Wednesday were supportive of the yen.

Gains in the yen were limited by weak Japanese economic news after Japan’s June machine tool orders fell by the most in nine months.  Also, worries about the upper house election in Japan on July 20 are negative for the yen.  The promises by Japan’s ruling Liberal Democratic Party of cash handouts to voters and promises of lower taxes by the opposition have sparked concerns of fiscal deterioration, which are bearish for the yen. 

Japan June machine tool orders fell -0.5% y/y, the biggest decline in nine months.

August gold (GCQ25) on Wednesday closed up +4.10 (+0.12%), and September silver (SIU25) closed down -0.119 (-0.32%).  Precious metals on Wednesday settled mixed.  Gold prices recovered from a 1-week low and turned higher on a decline in T-note yields.  Also, US trade policy has led to economic uncertainty that has boosted some safe-haven demand for precious metals.  In addition, central bank buying of gold is supporting prices after the People’s Bank of China (PBOC) purchased 70,000 MT of gold bullion in June, the eighth consecutive month the PBOC has added gold to its reserves.

Wednesday’s slightly stronger dollar was bearish for metals prices.  Also, the action by President Trump to postpone tariff hikes from July 9 to August 1 eased trade tensions slightly and curbed the safe-haven demand for precious metals.  In addition, strength in stocks on Wednesday reduced safe-haven demand for precious metals.  Finally, hawkish comments from ECB Governing Council member Holzmann undercut precious metals prices when he said the ECB doesn’t need to cut interest rates further.