The Dollar: Has it peaked?
- The USD index is retreating as the likelihood of a Fed rate hike diminishes.
- Gold has lost the ‘debasement trade’ as a key driver and is facing capital outflows from ETFs.
The US dollar took a hit after the macroeconomic data. Orders for durable goods fell 4.5% month-on-month in May, while the personal consumption expenditure index rose 0.4% month-on-month, falling short of forecasts. Despite an upward revision to first-quarter GDP, consumer spending proved weaker than expected. Combined with a statement from the Fed’s Williams that monetary policy is well-positioned, this pushed the USD index back from its recent highs.
The futures market has reduced the probability of a September monetary policy tightening to 58% and of two hikes in 2026 to 36%. US Treasury yields have plunged alongside, putting pressure on the US dollar.
Continuing falls in stock indices and the escalation of the conflict in the Middle East were poised to lend a helping hand to the greenback. There, Iran targeted a tanker passing through the Strait of Hormuz for the first time in two weeks. Nevertheless, the US did not escalate. The White House stated that no one was injured and that the movement of cargo through the world’s key oil artery continues.
The US dollar’s retreat has breathed new life into USDJPY bears. The yen has pulled back from its 40-year lows. The government's verbal interventions have done little to help. Nor has the statement by the Bank of Japan’s hawks on the need to bring the overnight rate to a neutral level of 2 per cent as quickly as possible.
Markets are drawing attention to the discrepancy between Tokyo’s fiscal and monetary policies. Sanae Takaichi’s new economic stimulus programme called for the BoJ to assist the government in sustaining domestic demand. Typically, this is achieved through lower interest rates.
The decline in the USD index and US Treasury yields has allowed gold to find its footing. The precious metal is facing headwinds as it loses a key advantage: the ‘debasement trade’. The focus of the Fed and other central banks on tightening monetary policy is boosting the appeal of fiat currencies. At the same time, there has been a capital outflow from ETFs. Their holdings have fallen by $12 billion since the end of February, marking the worst four-month period since 2013.
Summary: The Dollar retreated on the back of weak data and reduced expectations of Fed tightening; the yen and gold have found some respite, but ETF sell-offs are weighing on the metal.
Author
Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.
