Dollar Gains on Weakness in the Yen and British Pound

US dollar background by Iluhanos via iStock

The dollar index (DXY00) today is up by +0.30%. The dollar is climbing today due to increased trade tensions with Japan, as the yen has retreated after President Trump stated that a trade deal with Japan is unlikely. The dollar added to its gains when GBP/USD tumbled to a 1-week low on political turmoil in the UK after UK Prime Minister Starmer failed to fully back Chancellor of the Exchequer Reeves, bolstering speculation that Reeves may soon step down.

The dollar is being undercut by concern that the US labor market is weakening after the June ADP employment change declined for the first time in more than two years. Also, rising deficits are bearish for the dollar as the Congressional Budget Office estimates the Republicans’ reconciliation bill making its way through Congress would add nearly $3.3 trillion to US budget deficits over the next ten years.

The US June ADP employment change unexpectedly fell -33,000, weaker than expectations of a +98,000 increase and the first decline in 2-1/4 years.

The markets are discounting a 25% chance of a -25 bp rate cut at the July 29-30 FOMC meeting.

EUR/USD (^EURUSD) today is down by -0.41%. Dollar strength today is undercutting the euro. Also, today’s news that showed an unexpected increase in Eurozone unemployment is dovish for ECB policy and negative for the euro. The euro added to its losses today on dovish comments from ECB Governing Council member Rehn, who said he’s “concerned about inflation being below the ECB’s target for an extended period of time.”

The Eurozone May unemployment rate unexpectedly rose +0.1 to 6.3%, showing a weaker labor market than expectations of no change at 6.2%

ECB Governing Council member Centeno said the ECB “is not in a hurry” to cut interest rates further despite inflation being at its 2% target.

ECB Governing Council member Rehn said he’s “concerned about inflation being below the ECB’s target for an extended period of time” as the ECB is projecting 18 months of inflation below its goal due to US tariffs and the Eurozone economy’s struggle to expand.

Swaps are pricing in a 5% chance of a -25 bp rate cut by the ECB at the July 24 policy meeting.

USD/JPY (^USDJPY) today is up by +0.45%. The yen is under pressure today on the escalation of trade tensions between Japan and the US after President Trump said a trade deal with Japan is unlikely. Higher-than-expected tariffs on Japan may weaken its economy and prevent the BOJ from tightening monetary policy, a negative factor for the yen. Higher T-note yields today are also weighing on the yen.

President Trump said a trade deal with Japan is unlikely, so the country will most likely pay a tariff of 30%, 35% or “whatever the number is that we determine.”

August gold (GCQ25) today is down -3.60 (-0.10%), and September silver (SIU25) is up by +0.073 (+0.20%). Precious metals today are mixed. Today’s stronger dollar is undercutting precious metals prices. Also, easing of Middle East tensions has reduced safe-haven demand for precious metals after President Trump said Israel has agreed to a 60-day ceasefire in Gaza. Higher global bond yields today are also bearish for precious metals.

Precious metals have support from today’s US June ADP employment change report, which unexpectedly declined for the first time in more than two years, a sign of labor market weakness and a dovish factor for Fed policy. Also, ramped-up trade tensions with Japan have boosted safe-haven demand for precious metals after President Trump said a trade deal with Japan is unlikely. In addition, dovish comments today from ECB Governing Council member Rehn also gave precious metals a boost when he said he’s “concerned about inflation being below the ECB’s target for an extended period of time.” Gold also has support as a store of value due to concerns that President Trump’s reconciliation bill will increase the US budget deficit by $3.3 trillion over the next ten years, according to the CBO.

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 is solely for informational purposes. This article was originally published on Barchart.com