Dollar Index Dips Amid Credit Rating Downgrade and Inflation Concerns
The dollar index (DXY00) fell by -0.59% on Wednesday, reaching a two-week low. This decline follows Moody’s Ratings downgrading the US government’s credit rating from Aaa to Aa1 late last Friday due to rising budget deficits and fiscal concerns. Such a downgrade raises questions about the dollar’s status as a global reserve currency, possibly prompting investors to reduce their dollar holdings. Concurrently, discussions among legislators about a potential tax-cut package contribute to worries regarding increasing US budget deficits. However, higher Treasury note yields limited the dollar’s losses.
Market Expectations for Federal Reserve Actions
The markets currently assign a 5% probability to a -25 basis point rate cut following the FOMC meeting scheduled for June 17-18.
Euro Strengthens as Dollar Weakens
The EUR/USD (^^EURUSD) increased by +0.41%, marking a two-week high. The euro’s ascent was bolstered by Wednesday’s weakness in the dollar. Additionally, hawkish statements from ECB Governing Council member Kazaks, indicating that ECB interest rate cuts may soon come to an end, also supported the euro’s rise.
According to the ECB’s bi-annual Financial Stability Review, unusual moves away from traditional safe havens like the dollar and US Treasuries following April’s trade announcements could signal a potential “regime change.” Such shifts may lead to significant changes in capital flows that could impact the global financial landscape.
Central Bank Rate Cut Projections
Swaps indicate a 93% likelihood of a -25 basis point rate cut by the ECB at their policy meeting on June 5.
Japanese Yen Gains Ground
The USD/JPY (^^USDJPY) dropped by -0.61% on Wednesday, with the yen benefiting from rising Japanese government bond yields. The 10-year JGB bond yield climbed to a 1-3/4 month high at 1.539%. Increased geopolitical risks have further bolstered demand for the yen as new US intelligence suggests Israel may be preparing to strike Iranian nuclear facilities. Still, higher Treasury yields on Wednesday curtailed some gains for the yen.
Japanese trade data presented a mixed picture: April exports rose by +2.0% year-over-year, falling short of the anticipated +2.5% increase, while April imports saw a smaller decline of -2.2% year-over-year compared to the expected -4.2% drop.
Precious Metals Advance Despite Higher Yields
June gold (GCM25) closed up +28.90 (+0.88%), while July silver (SIN25) rose by +0.472 (+1.42%) on Wednesday. Precious metals experienced gains as gold rose to a 1-1/2 week high and silver reached a three-week high. The dollar’s decline and ongoing geopolitical tensions have increased safe-haven demand for these assets. Reports of Israel’s plans to escalate military actions have further fueled investors’ interests in gold and silver as stores of value amid rising US deficits and tax discussions.
However, higher global bond yields on Wednesday acted as a bearish factor for precious metals. Additionally, hawkish comments from ECB Governing Council member Kazaks regarding the nearing end of interest rate cuts contributed to selling pressure in the precious metals market. Fund liquidations of long gold positions are weighing on prices as the easing of US-China trade tensions leads to reduced tariffs, resulting in a drop of long gold positions in ETFs to a six-week low.
On the date of publication, Rich Asplund did not hold any positions in the securities mentioned in this article. All information and data in this article are for informational purposes only. For more detail, please view the Barchart Disclosure Policy here.
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