The dollar index (DXY00) rose by +0.24% on Tuesday. The dollar rose on Tuesday amid weakness in stocks, boosting liquidity demand for the currency. Also, higher crude oil prices on Tuesday pushed up inflation expectations and could persuade the Fed to keep monetary policy tight, a supportive factor for the dollar. In addition, hawkish comments from New York Fed President John Williams were supportive of the dollar, as he said inflation remains quite high. The dollar fell from its best level on Tuesday after the US May trade deficit widened to a 14-month high.
The US May trade deficit widened to -$77.6 billion, the largest deficit in 14 months and a negative factor for Q2 GDP.
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New York Fed President John Williams said inflation remains quite high and that he sees steady economic growth and labor market stability.
The swaps markets are discounting the odds at 25% for a +25 bp rate hike at the next FOMC meeting on July 28-29.
EUR/USD (^EURUSD) on Tuesday fell by -0.25%. The euro moved lower on Tuesday amid a stronger dollar. Losses in the euro were limited after German May industrial production rose more than expected by the most in 8 months. Also, Tuesday’s jump in the 10-year German Bund yield to a 2-week high strengthened the euro’s interest rate differentials.
German May industrial production rose +0.9% m/m, stronger than expectations of +0.1% m/m and the largest increase in 8 months.
The markets are discounting a +4% chance for a +25 bp rate hike by the ECB at its next policy meeting on July 23.
USD/JPY (^USDJPY) fell by -0.02% on Tuesday. The yen moved slightly higher on Tuesday amid some positive Japanese economic news after the Japan May leading index CI rose to a 4.75-year high and May household spending fell less than expected. Also, stronger Japanese government bond yields have strengthened the yen’s interest rate differentials after the 10-year JGB yield climbed to a 29-year high of 2.861% on Tuesday.
Gains in the yen were limited on Tuesday after Japan’s May real cash earnings rose less than expected, a dovish factor for BOJ policy. Also, comments from Japan’s Growth Strategy Minister Minoru Kiuchi were supportive of the yen when he said, “There’s absolutely no truth” to reports suggesting the government encouraged low interest rates as part of its fiscal expansion policy. In addition, higher T-note yields on Tuesday were negative for the yen.
