The dollar index (DXY00) rallied to a 2.5-week high on Friday and finished up by +0.47%. The dollar rallied on Friday on concerns that strong US economic news and soaring crude oil prices will prompt the Fed to tighten monetary policy, a bullish factor for the dollar. Friday’s economic news was bullish for the dollar after the May Empire manufacturing survey general business conditions unexpectedly rose to a 4-year high, and Apr manufacturing production posted its biggest increase in 14 months. Also, the 10-year T-note yield rose to an 11.75-month high of 4.60% on Friday, strengthening the dollar’s interest rate differentials. Finally, slumping equity markets on Friday boosted liquidity demand for the dollar.
The US May Empire manufacturing survey of general business conditions unexpectedly rose +8.6 to a 4-year high of 19.6, stronger than expectations of a decline to 7.2.
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US Apr manufacturing production rose +0.6% m/m, stronger than expectations of +0.2% m/m and the largest increase in 14 months.
Swaps markets are discounting the odds at 3% for a 25 bp rate cut at the next FOMC meeting on June 16-17.
EUR/USD (^EURUSD) tumbled to a 5-week low on Friday and finished down -0.41%. Friday’s stronger dollar pressured the euro. Also, Friday’s +4% surge in crude oil prices is negative for the Eurozone economy and the euro, as Europe imports most of its energy needs. Losses in the euro were limited after the 10-year German Bund yield soared to a 15-year high on Friday, strengthening the euro’s interest-rate differentials.
Swaps are discounting an 89% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.
USD/JPY (^USDJPY) on Friday rose by +0.23%. The yen has moved lower every day this week, falling to a 2-week low against the dollar on Friday. The strength of the dollar is pressuring the yen. Also, Friday’s +4% jump in crude oil prices is negative for the Japanese economy and the yen as Japan imports more than 90% of its energy needs. In addition, soaring T-note yields today are bearish for the yen.
Losses in the yen were limited after Japan’s April produce prices surge pushed the 10-year JGB bond yield to a nearly 29-year high of 2.736% on Friday, strengthening the yen’s interest rate differentials. Also, the largest increase in Japanese machine tool orders last month in 4.25 years is hawkish for BOJ policy and supportive for the yen.
