The dollar index (DXY00) Wednesday fell by -0.43%. The dollar on Wednesday gave up an overnight advance and turned lower after the US May ADP employment change rose less than expected and posted its smallest increase in more than two years, a sign of labor market weakness and a dovish factor for Fed policy. Also, falling T-note yields on Wednesday weakened the dollar's interest rate differentials.
Losses in the dollar accelerated Wednesday after the US May ISM services index unexpectedly contracted for the first time in 11 months and after the Fed's Beige Book hinted at stagflation with a slowdown of economic activity and rising prices.
The US May ADP employment change rose by +37,000, weaker than expectations of +114,000 and the smallest increase in more than two years.
The US May ISM services index unexpectedly fell -1.7 to 49.9, weaker than expectations of an increase to 52.0 and the first time the index has fallen below 50 and contracted in 11 months.
The Fed Beige Book said that economic activity has declined slightly since the previous report, with little change in employment and prices increasing at a "moderate" pace. Also, "All districts reported elevated levels of economic and policy uncertainty, which have led to hesitancy and a cautious approach to business and household decisions."
The markets are discounting the chances at 4% for a -25 bp rate cut after the June 17-18 FOMC meeting.
EUR/USD (^EURUSD) Wednesday rose by +0.40%. The euro moved higher Wednesday after weaker-than-expected US ADP and ISM reports weighed on the dollar. The euro also garnered support Wednesday after the Eurozone May S&P composite PMI was revised higher. Gains in the euro were limited by expectations for the ECB to cut interest rates by -25 bp at Thursday's policy meeting.
The Eurozone May S&P composite PMI was revised upward by +0.7 to 50.2 from the previously reported 49.5.
Swaps are discounting the chances at 97% for a -25 bp rate cut by the ECB at Thursday's policy meeting.
USD/JPY (^USDJPY) Wednesday fell by -0.78%. The yen found support Wednesday from a weaker dollar. The yen also rose after the Japan May Jibun Bank services PMI was revised upward. The yen added to its gains Wednesday after the 10-year T-note yield fell to a 3-1/2 week low.
On the negative side for the yen was a report from Reuters that said the BOJ is considering slowing the pace of tapering in its bond purchases as of the next fiscal year, a bearish factor for the yen.
The Japan May Jibun Bank services PMI was revised upward by +0.2 to 51.0 from the previously reported 50.8.
August gold (GCQ25) Wednesday closed up +22.10 (+0.65%), and July silver (SIN25) closed up +0.015 (+0.04%). Precious metals on Wednesday moved higher on a weaker dollar and lower global bond yields. Also, Wednesday's weaker-than-expected US ADP and ISM reports were dovish factors for Fed policy and supportive of precious metals prices. In addition, the Fed's Beige Book hinted at stagflation with a slowing economy and rising prices and boosted demand for precious metals as a store of value. Finally, precious metals prices have continued safe-haven support from global trade tensions and geopolitical tensions in Ukraine and the Middle East.
Gains in silver prices were limited Wednesday on concern the ongoing US-China trade turmoil will weaken economic activity and industrial metals demand after President Trump said Chinese President Xi Jinping is "very tough and extremely hard to make a deal with," dampening optimism that a trade deal can be made between the two countries in the near future. Also, Wednesday's weaker-than-expected US ADP and ISM reports were a signal weakness in the US economy and were negative for 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.
