The dollar index (DXY00) Wednesday recovered from early losses and rose by +0.09%. The dollar moved higher Wednesday afternoon due to hawkish comments from Fed Chair Powell, who said, “We expect a meaningful amount of inflation in the coming months.” Mr. Powell’s comments signal the Fed is not close to cutting interest rates and is supportive of the dollar. Also, heightened geopolitical risks in the Middle East support safe-haven demand for the dollar.
The dollar on Wednesday initially moved lower on the weaker-than-expected reports on US May housing starts and building permits. Also, the action by the FOMC to cut its US 2025 GDP forecast was bearish for the dollar. In addition, the FOMC’s dot-plot that projects two 25 bp interest rate cuts by the end of the year is negative for the dollar.
US weekly initial unemployment claims fell -5,000 to 245,000, right on expectations.
US May housing starts fell -9.8% m/m to a 5-year low of 1.256 million, weaker than expectations of 1.350 million. May building permits, a proxy for future construction, unexpectedly fell -2.0% m/m to a 4-3/4 year low of 1.393 million, weaker than expectations of no change at 1.422 million.
As expected, the FOMC kept the fed funds target rate unchanged at 4.25%-4.50% and said the uncertainty about the economic outlook has “diminished but remains elevated.” The statement removed the language that the committee “judges that the risks of higher unemployment and higher inflation have risen.”
The FOMC cut its US 2025 GDP estimate to 1.4% from 1.7% in March and raised its 2025 core inflation estimate to 3.1% from 2.8% in March.
The Fed’s dot plot of interest rate projections shows the median fed funds rate forecast at the end of 2025 at 3.875%, implying two quarter-point cuts this year, the same as they expected in March.
Fed Chair Powell said, “We expect a meaningful amount of inflation in the coming months” as the increases in tariffs are likely to boost prices and that their effects on inflation could be more persistent.
The markets are discounting the chances at 10% for a -25 bp rate cut after the July 29-30 FOMC meeting.
EUR/USD (^EURUSD) Wednesday fell by -0.04%. The euro on Wednesday gave up an early advance and finished slightly lower due to a rebound in the dollar. The euro was also under pressure Wednesday due to dovish comments from ECB Governing Council member Panetta, who stated that the Eurozone’s economic prospects face “substantial” risks due to US tariffs and the ongoing conflict in the Middle East.
Swaps are discounting the chances at 7% for a -25 bp rate cut by the ECB at the July 24 policy meeting.
USD/JPY (^USDJPY) Wednesday fell by -0.09%. The yen posted modest gains on Wednesday as heightened geopolitical risks in the Middle East have prompted safe-haven buying of the yen. Wednesday’s report showing a smaller-than-expected decline in Japan’s Apr core machine orders was also supportive of the yen. The yen fell back from its best level when T-note yields rose on hawkish comments from Fed Chair Powell.
Japan Apr core machine orders fell -9.1% m/m, a smaller decline than expectations of -9.5% m/m.
Japanese trade news was mixed as Japan’s May exports fell -1.7% y/y, a smaller decline than expectations of -3.7% y/y. However, May imports fell -7.7% y/y, weaker than expectations of -5.9% y/y and the biggest decline in 16 months.
August gold (GCQ25) Wednesday closed up +1.20 (+0.04%), and July silver (SIN25) closed down -0.238 (-0.64%). Precious metals on Wednesday settled mixed. Heightened geopolitical risks in the Middle East support safe-haven demand for precious metals as the war between Israel and Iran continues for a sixth day with no end in sight. In addition, global trade uncertainty is boosting safe-haven demand for precious metals after President Trump indicated last Wednesday that he is moving ahead with his reciprocal tariffs. Fund buying of silver continues to support prices as silver holdings in ETFs rose to a 2-1/4 year high Tuesday.
Wednesday’s recovery in the dollar from early losses to higher on the day undercut precious metals prices. Also, gold prices fell more than -$10 an ounce in after-hours trading Wednesday afternoon due to hawkish comments from Fed Chair Powell, who said, “We expect a meaningful amount of inflation in the coming months” due to tariffs. Silver prices also fell back after the FOMC cut its US 2025 GDP forecast and following Wednesday’s weaker-than-expected reports on US May housing starts and building permits, which showed weakness in industrial metals demand.
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.
