The dollar index (DXY00) on Thursday rose by +0.14%.  The dollar recovered from early losses on Thursday and moved higher after stocks gave up early gains and turned lower, boosting liquidity demand for the dollar.  The dollar also found support on Thursday’s dollar-friendly news on weekly jobless claims, Q1 nonfarm productivity, Q1 unit labor costs, construction spending, and consumer credit.  In addition, hawkish comments from Boston Fed President Susan Collins and Cleveland Fed President Beth Hammack were supportive of the dollar when they said they favored keeping interest rates on hold. 

The dollar initially moved lower on Thursday amid optimism that a peace deal between the US and Iran is imminent, which curbed safe-haven demand for the dollar today.  Also, Thursday’s early rally in the S&P 500 to a new record high dampened liquidity demand for the dollar. 

The markets are awaiting further updates after the US presented a proposal to Iran that would gradually reopen the Strait of Hormuz and lift the US blockade on Iranian ports.  Negotiations over Iran’s nuclear program would come later in the process.  Iran is expected to respond via Pakistan in the next few days.

The US is looking to restart the operation as soon as next week to guide commercial ships with naval and air support through the Strait of Hormuz after the Wall Street Journal reported that Saudi Arabia and Kuwait have lifted restrictions on the US military’s use of their bases and airspace when Iran launched missiles and drones at the UAE in response to the US effort to open the strait.  Saudi Arabia and Kuwait had blocked the US military’s use of their bases and airspace after senior US officials downplayed Iranian attacks on the Persian Gulf in reaction to opening the strait.

US weekly initial unemployment claims rose +10,000 to 200,00, showing a stronger labor market than expectations of 205,000. Weekly continuing claims unexpectedly fell -10,000 to a 2.24-year low of 1.766 million, showing a stronger labor market than expectations of an increase to 1.800 million.

US Q1 nonfarm productivity rose +0.8%, stronger than expectations of +0.6%.  Q1 unit labor costs rose by 2.3%, below expectations of 2.5%.

US Mar construction spending rose +0.6% m/m, stronger than expectations of +0.3% m/m.

US Mar consumer credit rose by +$24.855 billion, stronger than expectations of +$13.720 billion and the largest increase in 3.25 years.

Boston Fed President Susan Collins said interest rates should stay at current “mildly restrictive” levels, but “if the inflation trajectory looked like it was significantly moving in the wrong direction,” policymakers would “need to reassess what the appropriate policy would be.”

Cleveland Fed President Beth Hammack said the FOMC’s signal that the next rate move will be a cut is misleading, and her baseline is that interest rates will be on hold for a long period.

Swaps markets are discounting the odds at 7% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) on Thursday fell slightly by -0.02%.  The euro gave up an early advance on Thursday and finished slightly lower after the dollar index recovered from an early decline and moved higher.  The euro initially moved higher on Thursday amid better-than-expected Eurozone economic news on Mar Retail sales and German Mar factory orders.   

Eurozone Mar retail sales fell -0.1% m/m, a smaller decline than expectations of -0.3% m/m.

German Mar factory orders rose +5.0% m/m, stronger than expectations of +1.0% m/m.

Swaps are discounting a 73% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) on Thursday rose by +0.22%.  The yen gave up an early advance on Thursday and turned lower after the dollar index recovered from early losses and moved higher. Also, a rebound in crude oil prices from sharp early losses was bearish for the yen.  In addition, higher T-note yields on Thursday weighed on the yen.  Finally, Thursday’s 5% surge in the Nikkei Stock Index to a new all-time high curbed safe-haven demand for the yen.

The yen initially moved higher on Thursday amid carryover support from Wednesday, when Japanese authorities intervened in the forex market to support the yen.  Also, the early plunge in crude oil prices on Thursday was positive for the Japanese economy and the yen, as Japan imports more than 90% of its energy needs. 

According to a Bloomberg analysis of central bank accounts, Japanese authorities likely used around 4.68 trillion yen ($30 billion) to intervene in the currency market to support the yen on Wednesday.

The markets are discounting a +72% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) on Thursday closed up +16.60 (+0.35%), and July COMEX silver (SIN26) closed up +2.877 (+3.72%).

Gold and silver prices settled higher on Thursday, with gold posting a 2-week high and silver posting a 2.5-week high.  Thursday’s retreat in stocks from early highs boosted safe-haven demand for precious metals.  Also, lower crude oil prices on Thursday eased inflation expectations and could persuade the world’s central banks to pursue easier monetary policies, a bullish factor for precious metals.

However, Thursday’s recovery in the dollar from lower on the day to higher sparked long liquidation in precious metals.  Also, a jump in T-note yields weighed on precious metals prices.  In addition, hawkish comments on Thursday from Boston Fed President Susan Collins and Cleveland Fed President Beth Hammack were bearish for precious metals when they said they favored keeping interest rates on hold.

Precious metals remain supported by uncertainty over US tariffs, US political turmoil, large US deficits, and government policy uncertainty, which are boosting demand for precious metals as a store of value.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 4.5-month low on March 31 after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to an 8.75-month low on Tuesday after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following today’s news that bullion held in China’s PBOC reserves rose by +260,000 ounces to 74.64 million troy ounces in April, the largest monthly increase in a year and the eighteenth consecutive month the PBOC has boosted its gold reserves.