The dollar index fell 0.32% on Tuesday after a benign June US CPI report reduced the probability of a Federal Reserve rate hike later this month to 17%, from 43% on Monday. Gold surged 1.60% and silver rose 1.95% as the weaker dollar and lower Treasury yields boosted precious metals. The euro hit a one-week high, while the yen gained modestly amid mixed signals from Japanese officials and rising crude oil prices.
Dollar Weakens on Tame Inflation Data
The US dollar retreated broadly on Tuesday after the June consumer price index rose less than expected. Headline CPI came in at +3.5% year-over-year, down from +4.2% in May and below the +3.8% consensus. Core CPI eased to +2.6% y/y from +2.9%, beating forecasts of +2.8%. The data prompted markets to slash the odds of a 25-basis-point rate hike at the Fed's July 28-29 meeting to 17%, weighing heavily on the greenback.
Fed Chair Warsh said the economy remains resilient and growing at a solid pace, with a stable labor market and solid nominal wage growth, but reiterated that the Fed has "no tolerance" for persistently high inflation. Chicago Fed President Austan Goolsbee called the CPI report "surprisingly benign," though he stressed that policymakers need more than one month of data to confirm inflation is returning to the 2% target.
Safe-Haven Demand and Oil Support Dollar
Despite the CPI-driven decline, the dollar recovered from its worst levels as geopolitical tensions escalated. US forces launched another round of strikes against Iran, and the UAE reported that Iran attacked two oil tankers in Omani waters. The unrest pushed crude oil prices up more than 1% to a one-month high, raising inflation expectations and potentially prompting tighter monetary policy, which is supportive for the dollar.
Euro and Yen React to Divergent Forces
The euro rose 0.38% to a one-week high, benefiting from the dollar's weakness and higher European bond yields. The 10-year German Bund yield climbed to a 1.75-month high of 3.144%, improving the euro's interest rate differential. Markets currently price a 14% chance of a 25-bp rate hike by the ECB at its July 23 meeting.
The yen edged up 0.15% after Japanese Finance Minister Satsuki Katayama floated the idea of adding government bonds to a tax-free investment program for individuals, which could boost demand for the yen. The currency also gained as US Treasury yields fell on the CPI report. However, gains were capped by rising crude oil prices, which are negative for Japan's energy-import-dependent economy. The yen remains near a 39-year low above 160 per dollar, keeping intervention risk high.
Gold and Silver Surge on Dovish CPI
Gold futures for August delivery closed up $64.00 (+1.60%) at an unspecified level, while September silver rose $1.132 (+1.95%). The rally was driven by the weaker dollar and lower Treasury yields after the benign CPI data. The reduced chance of a Fed rate hike also supported precious metals. However, gains were trimmed as crude oil's jump boosted inflation expectations and after hawkish comments from Fed officials.
Long-term fund liquidation remains a headwind: gold ETF holdings fell to a 9.5-month low, and silver ETF holdings dropped to an 11.75-month low. On the positive side, strong central bank demand continues, with the PBOC adding 320,000 ounces of gold in May, the largest monthly increase in 17 months, marking the 19th consecutive month of reserve accumulation.