The dollar index (DXY00) is down by -0.10% today. The dollar is under modest pressure today amid a recovery in the yen, which rose from a 39-year low on the prospect of faster interest rate hikes from the BOJ. Losses in the dollar are limited due to today’s +3% rally in WTI crude oil to a 6-week high, which raises inflation expectations that could prompt the Fed to tighten monetary policy, a supportive factor for the dollar. Also, higher T-note yields today have strengthened the dollar’s interest rate differentials and are supportive of the dollar.
The US and Iran played down the prospect of peace talks as disruptions to global oil supplies continue to mount. The US conducted an 11th straight day of attacks on Iran in an effort to degrade the country’s ability to threaten commercial shipping in the Strait of Hormuz. Iran retaliated by striking US bases in Bahrain, Kuwait, and Jordan. President Trump said on Tuesday that the US has “no interest” in meeting with Iran until they are ready for serious peace negotiations.
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The swaps markets are discounting the odds at 29% for a +25 bp rate hike at the next FOMC meeting on July 28-29.
EUR/USD (^EURUSD) is up by +0.14% today. The euro is climbing today amid weakness in the dollar. Also, higher European government bond yields have strengthened the euro’s interest rate differentials and are supportive for the euro after the 10-year German Bund yield climbed to a 2-month high of 3.192% today. In addition, short-covering and position squaring are supportive for the euro ahead of the results of Thursday’s ECB meeting, where the ECB is expected to keep interest rates unchanged.
Gains in the euro are limited due to today’s +3% jump in crude oil prices to a 6-week high, which is negative for the Eurozone economy and the euro, as Europe imports most of its energy.
The markets are discounting a +5% chance of a +25 bp rate hike by the ECB at its next policy meeting on Thursday.
USD/JPY (^USDJPY) is down by -0.07% today. The yen recovered slightly today from Tuesday’s 39-year low against the dollar on better-than-expected Japanese trade news. Short covering also emerged in the yen on the prospects for faster BOJ interest rate hikes, after a Bloomberg report today said BOJ officials are open to raising rates faster than the consensus due to the yen’s continued weakness and upside inflation risks.
