Dollar Index Rises Amid Mixed Economic Signals and Fed Insights

The dollar index (DXY00) rose by +0.19% on Friday, bouncing back from earlier losses. This recovery followed unexpected increases in inflation expectations reported by the University of Michigan for May, which adds a hawkish element to Federal Reserve policy. Support for the dollar also came from remarks by Atlanta Fed President Bostic, who noted that while he anticipates a slowdown in the US economy this year, he does not foresee a recession.

Economic Reports Impacting Dollar Performance

Initially, the dollar experienced a downturn due to disappointing reports on US housing starts and building permits, along with an unexpected dip in the May consumer sentiment index from the University of Michigan, which reached a three-year low. Additionally, declining T-note yields on Friday put downward pressure on the dollar. Strength in the stock market reduced liquidity demand for the dollar.

Mixed Signals from Housing Market

For April, housing starts rose +1.6% month-over-month to 1.361 million, which was slightly below expectations of 1.364 million. In contrast, building permits fell -4.7% month-over-month to 1.412 million, missing the consensus of 1.450 million.

Inflation and Consumer Sentiment Insights

The April import price index, excluding petroleum, increased by +0.4% month-over-month, surpassing expectations of +0.1% and marking the largest rise in a year. Meanwhile, the University of Michigan’s May consumer sentiment index fell by -1.4 to 50.8, underperforming expectations that called for an increase to 53.4.

Additionally, May’s one-year inflation expectations soared to a 43-year high of 7.3%, exceeding predictions that anticipated no change at 6.5%. Long-term (5-10 year) inflation expectations also escalated to a 34-year high of 4.6%, higher than expectations of 4.4%.

Fed’s Rate Cut Outlook

Atlanta Fed President Bostic mentioned that he expects one rate cut this year due to ongoing economic uncertainty and tariffs exerting upward pressure on inflation. Currently, markets attribute a 9% likelihood for a -25 basis point rate cut during the June 17-18 FOMC meeting.

Euro and Yen Movements

The EUR/USD (^-EURUSD) pair fell by -0.29% on Friday, with the euro losing ground after an initial advance. This shift occurred as the dollar gained strength. The euro initially rose on hawkish comments from ECB Governing Council member Kazaks, who suggested that ECB interest rate cuts are nearing an endpoint.

Swaps are assigning a 91% probability for a -25 basis point rate cut during the ECB’s June 5 policy meeting.

Meanwhile, the USD/JPY (^-USDJPY) increased by +0.13% as the yen faced pressure following Japan’s Q1 GDP contraction, which was worse than anticipated. Dovish comments from BOJ Board member Nakamura also weighed on the yen, as he cautioned against hastily increasing interest rates, emphasizing the need to monitor the impact of US tariffs.

Japan’s Q1 GDP fell by -0.7% on a quarter-over-quarter annualized basis, underperforming the expected -0.3%. The Q1 deflator rose by +3.3% year-over-year, slightly higher than the expected +3.2%.

A revision of March’s industrial production data showed a positive adjustment, up to +0.2% month-over-month from a previous estimate of -1.1%.

Trends in Precious Metals

June gold (GCM25) closed down -39.40 (-1.22%), and July silver (SIN25) fell by -0.326 (-1.00%) on Friday, as precious metals settled sharply lower. Demand for safe-haven assets decreased, influenced by renewed talks between Ukraine and Russia aimed at ending the three-year conflict. Additionally, easing tensions in US-China trade due to recent tariff agreements has led to further liquidation of gold positions, with holdings in ETFs dropping to a five-week low.

However, precious metals did recover from their lowest levels following the unexpected rise in inflation expectations, fostering renewed interest as an inflation hedge. Lower global bond yields also supported precious metals, alongside ongoing geopolitical tensions in the Middle East related to Israel’s military actions.

Silver was pressured by signs of weakening demand in industrial metals, as April housing starts and building permits declined more than expected and Japan’s GDP contraction raised further concerns about industrial activity.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are solely for informational purposes. For more information, please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.