The dollar index (DXY) is up 0.06% today amidst escalating US-Iran hostilities that have increased crude oil prices, raising inflation expectations. This could pressure the Federal Reserve to tighten monetary policy, supporting the dollar. The US and Iran have exchanged attacks for ten consecutive days, with the US targeting military installations in Iran and Iran striking US sites in Kuwait and Jordan.
The yen dropped to a 39-year low against the dollar as crude prices surged by 2%, negatively impacting Japan’s economy, which relies heavily on energy imports. The market anticipates high chances of Japanese intervention to support the yen if it remains above 160 per dollar, a level historically prompting responses from authorities. The swaps market currently discounts an 18% probability of a 25 basis point rate hike by the Federal Reserve at their upcoming meeting on July 28-29, and a negligible chance for a hike from the Bank of Japan during their meeting on July 31.
In commodities, August COMEX gold is up by $55.10 (1.37%), and September COMEX silver increased by $2.228 (3.90%), bolstered by safe-haven demand amid geopolitical tensions. However, the strength of the dollar combined with rising global bond yields poses a bearish outlook for precious metals, particularly following recent fund liquidations which saw gold ETF holdings drop to a 9.75-month low. Notably, China’s PBOC has continued to increase its gold reserves, adding 480,000 ounces in June.
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