The U.S. dollar index (DXY00) experienced a rebound on Friday, closing up +0.12% and recovering from a two-week low. This upward movement was largely attributed to the resurgence of trade tensions, specifically President Trump’s threat to impose tariffs as high as 25% on European automobile imports.
Earlier in the trading session, the dollar had shown weakness. This initial decline was influenced by a more than 3% drop in crude oil prices, which eased inflation expectations. Lower inflation expectations are typically viewed as a dovish signal for Federal Reserve policy and a negative factor for the dollar. Further pressure on the dollar came with the release of a weaker-than-expected April ISM manufacturing report.
Adding to the dollar’s safe-haven appeal were heightened tensions between the United States and Iran. The ongoing dispute over control of the Strait of Hormuz, with both nations engaging in blockades to gain leverage, has increased demand for the dollar as a secure asset. President Trump reiterated his commitment to a naval blockade of Iran, while Iran’s Supreme Leader, Mojtaba Khamenei, vowed to maintain control of the Strait and not relinquish nuclear or missile technologies.
The April ISM manufacturing index remained unchanged at 52.7, falling short of economists’ expectations for an increase to 53.2. However, the prices paid sub-index within the ISM report saw a significant jump, rising by +6.3 points to an 84.6, a four-year high and exceeding the forecast of 80.3.
In the derivatives market, swaps are currently pricing in an 8% probability of a 25 basis point rate cut at the upcoming Federal Open Market Committee (FOMC) meeting scheduled for June 16-17.
Euro Faces Headwinds Amidst Tariff Concerns
The EUR/USD pair fell by -0.06% on Friday, reversing earlier gains and closing lower. The euro’s retreat was primarily driven by the escalating tariff tensions following President Trump’s remarks regarding potential auto tariffs on European imports. Earlier in the day, the euro had found support from hawkish commentary by European Central Bank (ECB) Governing Council member Nagel, who suggested that the ECB might need to raise interest rates in June if the inflation outlook does not improve. Additionally, the sharp decline in crude oil prices provided some support for the Eurozone economy, given Europe’s reliance on energy imports.
Trading activity in European markets was subdued on Friday due to the Labor Day holiday. ECB Governing Council member and Bundesbank President Joachim Nagel stated that the ECB would consider an interest rate increase in June unless there is a significant improvement in the inflation outlook. Swaps markets are currently discounting an 89% chance of a 25 basis point rate hike by the ECB at its next policy meeting on June 11.
Yen Weakens as Trade Tensions and Domestic Data Weigh
The USD/JPY pair climbed by +0.28% on Friday, with the yen falling from a two-month high against the dollar. The renewed trade tensions between the U.S. and the EU provided a boost to the dollar, consequently pressuring the yen. Furthermore, a weaker-than-expected April Tokyo Consumer Price Index (CPI) report from Japan contributed to the yen’s decline, signaling a potentially dovish stance from the Bank of Japan (BOJ) and negatively impacting the yen.
Earlier in the session, the yen had initially moved higher following upward revisions to Japan’s April S&P manufacturing PMI, which indicated the strongest pace of expansion in 4.25 years. The yen also benefited from carryover support from Thursday, when the Japanese government and the BOJ reportedly intervened in the forex market, spending approximately $34.5 billion to support the currency. The sharp drop in crude oil prices also offered some support to the Japanese economy and the yen, as Japan imports the majority of its energy needs.
The Japan April S&P manufacturing PMI was revised upwards to 55.1 from a previous reading of 54.9, marking the fastest expansion in over four years. However, the Japan April Tokyo CPI rose by 1.5% year-on-year, below the expected 1.7%. The core CPI (excluding fresh food and energy) increased by 1.9% year-on-year, also weaker than the anticipated 2.2% and representing the slowest pace of increase in 14 months.
Market participants are currently discounting a 65% chance of a 25 basis point BOJ rate hike at its next policy meeting on June 16.
Precious Metals Mixed Amidst Competing Forces
June COMEX gold (GCM26) closed up +14.90 (+0.32%), while July COMEX silver (SIN26) saw a more significant gain, closing up +2.403 (+3.25%). Precious metals prices initially moved higher on Friday, with silver reaching a one-week high. The plunge in crude oil prices eased inflation concerns, potentially prompting central banks to adopt more accommodative monetary policies, which is generally bullish for precious metals. However, the dollar’s rebound from its two-week low later in the day capped gains for gold and silver.
Heightened Middle East tensions, particularly the ongoing blockades of the Strait of Hormuz by both the U.S. and Iran, continued to support safe-haven demand for precious metals. President Trump’s confirmation of a naval blockade against Iran and Iran’s stance on its nuclear and missile technologies and control of the Strait of Hormuz added to geopolitical uncertainty.
Conversely, bearish factors for precious metals included the potential for elevated energy prices due to the naval blockade, which could fuel inflation and deter central banks from easing monetary policy. Hawkish comments from ECB Governing Council member Nagel also weighed on precious metals, as his remarks about a potential June rate hike suggested tighter monetary conditions.
Precious metals are also being supported by broader uncertainties surrounding U.S. tariffs, domestic political turmoil, substantial U.S. deficits, and general government policy uncertainty, all of which bolster demand for precious metals as a store of value. Recent outflows from precious metals ETFs, with gold ETF holdings falling to a 4.5-month low and silver ETF holdings reaching an 8.5-month low, present a bearish technical signal. However, strong central bank demand for gold, exemplified by China’s PBOC increasing its gold reserves for the seventeenth consecutive month, remains a supportive factor for gold prices.
