A one dollar bill floating in water by Wirestock via iStock
The dollar index (DXY00) on Wednesday fell by -0.03%. The dollar gave up an early advance Wednesday and turned lower on concern that the US labor market is weakening after the June ADP employment change declined for the first time in more than two years. Also, Wednesday’s rally in the S&P 500 to a new record high curbed liquidity demand for the dollar. Rising deficits are also bearish for the dollar as the Congressional Budget Office estimates the Republicans’ reconciliation bill making its way through Congress would add nearly $3.3 trillion to US budget deficits over the next ten years.
The dollar initially moved higher Wednesday due to increased trade tensions with Japan, as the yen has retreated after President Trump stated that a trade deal with Japan is unlikely. The dollar added to its gains when GBP/USD tumbled to a 1-week low on political turmoil in the UK after UK Prime Minister Starmer failed to fully back Chancellor of the Exchequer Reeves, bolstering speculation that Reeves may soon step down.
The US June ADP employment change unexpectedly fell -33,000, weaker than expectations of a +98,000 increase and the first decline in 2-1/4 years.
The markets are discounting a 23% chance of a -25 bp rate cut at the July 29-30 FOMC meeting.
EUR/USD (^EURUSD) Wednesday fell by -0.07%. The euro came under pressure from Wednesday’s news that showed an unexpected increase in Eurozone unemployment, which is dovish for ECB policy and negative for the euro. The euro added to its losses Wednesday on dovish comments from ECB Governing Council member Rehn, who said he’s “concerned about inflation being below the ECB’s target for an extended period of time.” The euro recovered most of its losses after the dollar gave up early gains and turned lower, which sparked short covering in the euro.
The Eurozone May unemployment rate unexpectedly rose +0.1 to 6.3%, showing a weaker labor market than expectations of no change at 6.2%
ECB Governing Council member Centeno said the ECB “is not in a hurry” to cut interest rates further despite inflation being at its 2% target.
ECB Governing Council member Rehn said he’s “concerned about inflation being below the ECB’s target for an extended period of time” as the ECB is projecting 18 months of inflation below its goal due to US tariffs and the Eurozone economy’s struggle to expand.
Swaps are pricing in a 5% chance of a -25 bp rate cut by the ECB at the July 24 policy meeting.
USD/JPY (^USDJPY) Wednesday rose by +0.14%. The yen was under pressure Wednesday on the escalation of trade tensions between Japan and the US after President Trump said a trade deal with Japan is unlikely. Higher-than-expected tariffs on Japan may weaken its economy and prevent the BOJ from tightening monetary policy, a negative factor for the yen. Higher T-note yields on Wednesday also weighed on the yen.
President Trump said a trade deal with Japan is unlikely, so the country will most likely pay a tariff of 30%, 35% or “whatever the number is that we determine.”
August gold (GCQ25) Wednesday closed up +9.90 (+0.30%), and September silver (SIU25) closed up by +0.330 (+0.91%). Precious metals settled higher on Wednesday. Precious metals were supported from Wednesday’s US June ADP employment change report, which unexpectedly declined for the first time in more than two years, a sign of labor market weakness and a dovish factor for Fed policy. Also, ramped-up trade tensions with Japan have boosted safe-haven demand for precious metals after President Trump said a trade deal with Japan is unlikely. In addition, dovish comments today from ECB Governing Council member Rehn also gave precious metals a boost when he said he’s “concerned about inflation being below the ECB’s target for an extended period of time.” Precious metals added to their gains Wednesday when the dollar gave up an early advance and turned lower. Gold also has support as a store of value due to concerns that President Trump’s reconciliation bill will increase the US budget deficit by $3.3 trillion over the next ten years, according to the CBO.
On the negative side for precious metals on Wednesday was an easing of Middle East tensions that reduced safe-haven demand for precious metals after President Trump said Israel has agreed to a 60-day ceasefire in Gaza. Higher global bond yields on Wednesday were also bearish for precious metals.
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
