The dollar index (DXY00) Monday rose by +0.30% and posted a 1.5-week high. The weakness in stocks on Monday boosted some liquidity demand for the dollar. The dollar extended its gains Monday when President Trump announced plans to hike tariffs on several countries, including Japan, South Korea, Laos, South Africa, Myanmar, and Malaysia, with rates ranging from 25% to 40%, effective August 1. The higher tariffs could boost inflation and prevent the Fed from cutting interest rates, a supportive factor for the dollar.
Gains in the dollar were limited on Monday after President Trump signed the reconciliation bill into law on Friday, when US markets were closed. The nonpartisan Congressional Budget Office estimates that the bill will add $3.4 trillion to US budget deficits over the next decade. The fiscal stimulus from the bill will be a net positive for the US economy, but the higher deficit is negative for the dollar as it increases the risk of an eventual debt crisis in the US and reduces foreign investor confidence in the US.
The markets are discounting a 5% chance of a -25 bp rate cut at the July 29-30 FOMC meeting.
EUR/USD (^EURUSD) Monday fell by -0.48% to a 1-week low, mainly due to dollar strength. Also, weaker-than-expected Eurozone economic news weighed on the euro after Eurozone May retail sales fell more than expected. Limiting losses in the euro was the jump in the Eurozone's July Sentix investor confidence index to a nearly 3.5-year high, as well as the unexpected increase in German May industrial production.
The Eurozone July Sentix investor confidence index rose +4.3 to a nearly 3.5-year high of 4.5, stronger than expectations of 1.0.
Eurozone May retail sales fell -0.7% m/m, weaker than expectations of -0.6% m/m and the biggest decrease in 1.75 years.
German May industrial production unexpectedly rose +1.2% m/m, stronger than expectations of a -0.2% m/m decline.
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) Monday rose sharply by +1.11%. The yen tumbled to a 2-week low against the dollar Monday after President Trump raised US tariffs on Japanese exports to 25% beginning August 1, which could hurt the Japanese economy. Also, the rising tariffs may prevent the BOJ from raising interest rates further. Higher T-note yields on Monday also weighed on the yen.
The Japan May leading index CI rose +1.1 to 105.3, stronger than expectations of 105.2.
Japan May labor cash earnings rose +1.0% y/y, weaker than expectations of +2.4% y/y.
August gold (GCQ25) Monday closed down -0.10 (-0.01%), and September silver (SIU25) closed down -0.169 (-0.46%). Precious metals were under pressure Monday from a stronger dollar. Also, higher global bond yields on Monday weighed on precious metals. In addition, industrial metals demand concerns undercut silver prices after President Trump said that he will impose an additional 10% tariff on countries aligned with the BRICS bloc, which includes Brazil, China, South Africa, and India, with no exemptions.
Precious metals recovered most of their losses on Monday after stock market weakness boosted safe-haven demand for precious metals. Also, trade tensions are boosting safe-haven demand for precious metals after President Trump announced plans to hike tariffs on several countries, including Japan, South Korea, Laos, South Africa, Myanmar, and Malaysia, with rates ranging from 25% to 40%, effective August 1. Fund buying of silver is supporting silver prices as silver holdings in ETFs rose to a 2.75-year high last Friday.
