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The dollar index (DXY00) fell by -0.04% on Wednesday. The dollar posted modest losses on Wednesday amid a mild recovery in the euro and the yen. The euro rose ahead of Thursday's ECB meeting, and the yen recovered slightly from Tuesday's 39-year low on the prospect of faster BOJ interest rate hikes.
Losses in the dollar were limited amid Wednesday's +2% rally in WTI crude oil to a 6-week high, which raised inflation expectations that could prompt the Fed to tighten monetary policy, a supportive factor for the dollar. Also, higher T-note yields on Wednesday strengthened the dollar's interest rate differentials and are supportive of the dollar. In addition, concerns that the war in the Middle East could widen are supporting safe-haven demand for the dollar after the Joint Maritime Information Center, a monitoring body for naval security, said the Iran-backed Houthi rebels have deployed missiles and drones in preparation for attacks on shipping in the Red Sea. The Houthis have vowed to blockade shipping linked to Saudi Arabia and warned shipowners against calling at the nation's ports.
The US and Iran played down the prospect of peace talks as disruptions to global oil supplies continue to mount. The US conducted an 11th straight day of attacks on Iran on Wednesday in an effort to degrade the country's ability to threaten commercial shipping in the Strait of Hormuz. Iran retaliated by striking US bases in Bahrain, Kuwait, and Jordan. President Trump said on Tuesday that the US has "no interest" in meeting with Iran until they are ready for serious peace negotiations.
The swaps markets are discounting the odds at 34% for a +25 bp rate hike at the next FOMC meeting on July 28-29.
EUR/USD ([^EURUSD](https://www.barchart.com/forex/quotes/%5EEURUSD/overview)) rose by +0.11% on Wednesday. The euro moved higher on Wednesday amid weakness in the dollar. Also, higher European government bond yields have strengthened the euro's interest rate differentials and have been supportive of the euro after the 10-year German Bund yield climbed to a 2-month high of 3.192% on Wednesday. In addition, short-covering and position squaring supported the euro ahead of the results of Thursday's ECB meeting, where the ECB is expected to keep interest rates unchanged.
Gains in the euro were limited due to Wednesday's +2% jump in crude oil prices to a 6-week high, which is negative for the Eurozone economy and the euro, as Europe imports most of its energy.
The markets are discounting a +5% chance of a +25 bp rate hike by the ECB at its next policy meeting on Thursday.
USD/JPY ([^USDJPY](https://www.barchart.com/forex/quotes/%5EUSDJPY/overview)) fell by -0.02% on Wednesday. The yen strengthened slightly on Wednesday, recovering from Tuesday's 39-year low against the dollar on better-than-expected Japanese trade news. Short covering also emerged in the yen on the prospects for faster BOJ interest rate hikes, after a Bloomberg report on Wednesday said that BOJ officials are open to raising rates faster than the consensus due to the yen's continued weakness and upside inflation risks.
Gains in the yen were limited on Wednesday amid strength in crude oil prices. WTI crude rose more than +2% on Wednesday to a 6-week high, which is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy. Also, higher T-note yields on Wednesday weighed on the yen.
Better-than-expected Japanese trade news is supportive of the yen after Japan's Jun exports rose 19.3% y/y, stronger than the +18.0% y/y expected and the largest increase in 3.5 years. Also, Jun imports rose +25.4% y/y, stronger than expectations of +21.2% y/y and the largest increase in 3.5 years.
The risk of intervention in currency markets to support the yen is high, as the yen remains firmly above 160 per dollar at a 39-year low. Japanese authorities have intervened in the forex market several times in the past when the yen surpassed that level.
The markets are discounting a +2% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.
August COMEX gold (GCQ26) on Wednesday closed up +75.50 (+1.85%), and September COMEX silver (SIU26) closed up +1.190 (+2.01%).
Gold and silver prices rallied sharply on Wednesday, posting 2-week highs. Precious metals were supported Wednesday by a weaker dollar. Also, concerns that the war in the Middle East could widen are supporting safe-haven demand for precious metals after Houthi rebels said they will impose a maritime blockade on Saudi Arabia in retaliation for what they say is the kingdom's siege on the Yemeni capital.
Higher global bond yields on Wednesday were bearish for precious metals. Also, Wednesday's +2% rally in crude oil prices to a 6-week high raised inflation expectations and could prompt the world's central banks to tighten monetary policy, a bearish factor for precious metals. In addition, Wednesday's Bloomberg report that said BOJ officials are open to raising interest rates faster than the consensus is negative for precious metals.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.75-month low on Monday, after reaching a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 1-year low last Tuesday from the 3.5-year high posted on December 23.
Strong central bank demand for gold is supportive of gold prices, following news that bullion held in China's PBOC reserves rose by +480,000 ounces to 75.44 million troy ounces in June, the twentieth consecutive month the PBOC boosted its gold reserves.
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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