Dollar Falls as Stocks Rally and T-note Yields Decline

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4 days ago

The dollar index (DXY00) Monday fell by -0.65% and posted a 1-week low. The dollar retreated on Monday as a rally in the S&P 500 to a new record high has reduced liquidity demand for the dollar. Lower T-note yields on Monday also pressured the dollar.
US June leading economic indicators fell 0.3% m/m, right on expectations.
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Federal funds futures prices are discounting the chances for a -25 bp rate cut at 3% at the July 29-30 FOMC meeting and 58% at the following meeting on September 16-17.
EUR/USD (^EURUSD) Monday rose by +0.58%. The euro rose on Monday due to the dollar's weakness. Also, expectations that the ECB is closer to the end of its easing cycle than the Federal Reserve are boosting the euro as the ECB has cut interest rates four times this year while the Fed has not cut rates yet this year. Additionally, US trade policies are prompting foreign investors to shift away from dollar-denominated assets and into euro-denominated assets.
Gains in the euro are limited due to concerns that President Trump is pushing for a minimum tariff of 15%-20% in any trade deal with the European Union (EU), as Mr. Trump has remained unmoved by the latest EU offer to reduce car tariffs. Higher tariff rates on EU goods could undercut the Eurozone economy, a bearish factor for the euro.
Swaps are pricing in a 2% chance of a -25 bp rate cut by the ECB at Thursday's policy meeting.
USD/JPY (^USDJPY) Monday fell by -0.99%. The yen rallied against the dollar on Monday after Prime Minister Ishiba said he would carry on as leader despite his ruling LDP coalition losing its majority after Sunday's upper house elections. Monday's moves in the yen may be excessive due to below-average trading, as Japanese markets were closed for the Marine Day holiday.
The upside in the yen in the near term may be limited due to concerns that the LDP's loss of its majority in Japan's upper house may lead to fiscal deterioration in Japan's government finances, as the government boosts spending and implements tax cuts.
Japan's ruling Liberal Democratic Party (LDP) lost its majority in the upper house after Sunday's elections, with the LDP party winning only 47 seats, below the 50 it needed to win to maintain control.
August gold (GCQ25) Monday closed up +48.10 (+1.43%), and September silver (SIU25) closed up +0.870 (+2.26%). Precious metals settled sharply higher on Monday, with gold reaching a 4-week high. Monday's dollar weakness and lower global government bond yields were bullish for precious metals. Also, precious metals have carryover support from last Friday when Fed Governor Waller expressed support for a Fed interest rate cut at the July 29-30 FOMC meeting. In addition, precious metals have safe-haven support from global trade tensions, following President Trump's announcement last Wednesday that he intends to send a tariff letter to more than 150 countries, notifying them that their tariff rates could be 10% or 15%, effective August 1.
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. This article was originally published on Barchart.com