US Deficit Concerns Undercut the Dollar and Boost Gold
The dollar index (DXY00) Wednesday fell by -0.59% and posted a 2-week low. The dollar remains under pressure after Moody's Ratings late last Friday downgraded the US government's credit rating from Aaa to Aa1, citing a ballooning budget deficit and fiscal concerns. The downgrade puts the dollar's status as a global reserve currency into question and may prompt some investors to lighten up on their dollar assets. Also, worries about rising US budget deficits are undercutting the dollar, with legislators discussing a tax-cut package. Higher T-note yields on Wednesday limited losses in the dollar.
The markets are discounting the chances at 5% for a -25 bp rate cut after the June 17-18 FOMC meeting.
EUR/USD (^EURUSD) Wednesday rose by +0.41% and posted a 2-week high. Wednesday's dollar weakness supported gains in the euro. The euro also moved higher on Wednesday due to hawkish comments from ECB Governing Council member Kazaks, who said ECB interest rate cuts are nearing an end.
The ECB, in its bi-annual Financial Stability Review, said the 'atypical shifts' away from traditional havens like the dollar and US Treasuries after April's trade announcements may point to a 'fundamental regime change.' That raises the danger of 'broader shifts in capital flows that could have potentially far-reaching consequences for the global financial system.'
ECB Governing Council member Kazaks said ECB interest rate cuts are nearing an end, assuming the base case for inflation stabilizing at 2% over the coming months is realized.
Swaps are discounting the chances at 93% for a -25 bp rate cut by the ECB at the June 5 policy meeting.
USD/JPY (^USDJPY) Wednesday fell by -0.61%. The yen on Wednesday added to this week's rally and posted a 2-week high against the dollar. The yen found support Wednesday from rising Japanese government bond yields after the 10-year JGB bond yield jumped to a 1-3/4 month high of 1.539%. Also, the escalation of geopolitical risks has boosted safe-haven demand for the yen after CNN reported that new US intelligence suggests Israel is preparing for a potential strike on Iranian nuclear facilities. Higher T-note yields on Wednesday limited gains in the yen.
Japanese trade news was mixed. Apr exports rose +2.0% y/y, weaker than expectations of +2.5% y/y. Apr imports fell -2.2% y/y, a smaller decline than expectations of -4.2% y/y.
June gold (GCM2 5) Wednesday closed up +28.90 (+0.88%), and July silver (SIN2 5) closed up +0.472 (+1.42%). Precious metals on Wednesday settled higher, with gold climbing a 1-1/2 week high and silver posting a 3-week high. Wednesday's fall in the dollar to a 2-week low supports precious metals. Also, escalating geopolitical risks are ramping up safe-haven demand for precious metals after CNN reported that Israel may be planning a strike on Itan's nuclear facilities. In addition, worries about rising US deficits are boosting precious metals as a store of value, with US legislators discussing a tax-cut package. Finally, geopolitical risks in the Middle East continue to support safe-haven demand for precious metals. Israeli Prime Minister Netanyahu announced an 'unprecedented attack' on Hamas and said Israel would take over the entire Gaza Strip. Also, Israel's airstrikes on Houthi rebels in Yemen continue.
Higher global bond yields on Wednesday were bearish for precious metals. Also, hawkish comments on Wednesday from ECB Governing Council member Kazaks were bearish for precious metals when he said ECB interest rate cuts are nearing an end. Fund liquidation of long gold positions continues to weigh on prices due to the easing of US-China trade tensions after China and the US recently agreed to reduce tariffs on each other's goods. Long gold positions in ETFs fell to a 6-week low on Tuesday.
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