The dollar index (DXY00) slipped 0.12% on Wednesday after US June producer prices rose less than expected, reducing the probability of a Federal Reserve rate hike at the July FOMC meeting to 11% from 43% on Monday. The benign PPI data reinforced the dovish signal from last week's CPI report, pressuring the greenback despite ongoing safe-haven demand from escalating US-Iran hostilities.
Dollar Under Pressure from Soft Inflation Data
The US June producer price index for final demand rose 5.5% year-over-year, down from 6.0% in May and below the 6.2% consensus estimate. Core PPI, excluding food and energy, increased 4.7% year-over-year, also weaker than the expected 5.1%. The data dampened expectations for a rate hike at the July 28-29 FOMC meeting, with swaps markets now pricing only a 12% chance of a 25-basis-point increase.
New York Fed President John Williams acknowledged that inflation remains "unquestionably too high" but noted "encouraging reasons to expect that inflation has peaked and should edge down in coming quarters." The dollar's losses were limited, however, as US forces launched a fifth straight day of airstrikes against Iran, boosting safe-haven demand. President Trump pledged to intensify the bombardment until Iran stops attacking ships in the Strait of Hormuz, and Iran retaliated with missile and drone attacks against Kuwait.
The July Empire manufacturing survey provided some support for the dollar, with the general business conditions index rising to 15.6 from 5.7 in June, above the forecast of 9.2.
Euro Gains on Weak Dollar, Higher Yields
EUR/USD rose 0.12%, benefiting from the dollar's weakness and a rise in European bond yields. The 10-year German Bund yield climbed to a 1.75-month high of 3.148%, strengthening the euro's interest rate differentials. However, gains were capped after Eurozone May industrial production unexpectedly fell 0.2% month-over-month, missing expectations of a 0.2% increase.
ECB Governing Council member Joachim Nagel said energy price developments are a decisive factor for the inflation outlook, and monetary policy will maintain a vigilant stance. Markets see only a 6% chance of a 25-bp rate hike at the ECB's July 23 meeting.
Yen Steadies as PPI Weighs on Dollar
USD/JPY edged down 0.05%, as the yen found support from the weaker US PPI report and lower Treasury yields. The yen also retained carryover support from Tuesday, when Japanese Finance Minister Satsuki Katayama indicated that the ruling party is discussing adding government bonds to a tax-free investment program for individuals, which could boost yen demand.
Japanese economic data was mixed: the May tertiary industry index rose 1.1% month-over-month, beating the 0.4% forecast, but May core machine orders plunged 12.4% month-over-month, far worse than the expected 4.2% decline and the largest drop in nearly 6.5 years. The yen remains near a 39-year low above 160 per dollar, keeping intervention risk high. Markets price only a 2% chance of a BOJ rate hike at the July 31 meeting.
Precious Metals Mixed; Gold Edges Higher
August COMEX gold rose 0.06% to $2,360.20, while September COMEX silver fell 0.58% to $28.12. The weaker-than-expected PPI and reduced Fed rate hike odds supported precious metals by pushing the dollar and Treasury yields lower. However, strength in equities reduced safe-haven demand, and higher crude oil prices boosted inflation expectations, potentially prompting tighter global monetary policy—a negative for metals.
Silver faced additional pressure from signs of slowing growth in China, the world's top industrial metals consumer. China's Q2 GDP grew 4.3% year-over-year, below the 4.4% forecast and the slowest pace in 3.5 years. Fund liquidation also weighed on prices: gold ETF holdings fell to a 9.5-month low, and silver ETF holdings dropped to an 11.75-month low. On the supportive side, China's PBOC increased its gold reserves by 320,000 ounces in May, the largest monthly addition in 17 months, marking the 19th consecutive month of purchases.