The U.S. dollar strengthened Wednesday as Treasury yields rose after remarks from Federal Reserve Chair Janet Yellen offered little direction on the timing of future rate moves. The move was tempered later in the day when U.S. economic data pointed to a softer labor market and weak manufacturing activity. Elsewhere, the euro slid after Eurozone inflation cooled more than expected, while the yen steadied after hitting a 39-year low.
Precious metals also staged a rebound, with gold and silver closing higher after weaker-than-expected U.S. data boosted expectations for a more gradual path for Fed policy, while geopolitical concerns continued to support safe-haven demand.
Key takeaways
- Dollar index up 0.19%: The greenback rose on higher Treasury yields following Fed Chair Warsh’s comments, but later gave back some gains as U.S. data disappointed.
- Euro falls 0.37%: The euro weakened after Eurozone CPI eased more than expected, reinforcing expectations of a less hawkish ECB stance.
- Yen modestly higher: USD/JPY fell slightly as the yen recovered from a 39-year low after Japan’s Tankan survey surprised to the upside.
- Gold rises 1.09%: Precious metals rallied as soft U.S. growth indicators reduced inflation expectations and supported a dovish tilt in central-bank expectations.
What drove the dollar and currency moves
Wednesday’s dollar strength initially tracked rising U.S. Treasury note yields. According to the market reaction described in the report, investors pushed the dollar higher after Fed Chair Warsh provided no clear guidance on interest rates at a meeting of central bankers in Portugal.
Additional support came from currency cross-currents. The euro weakened following the Eurozone’s June CPI release, and the yen fell to a new 39-year low against the dollar earlier in the session—both factors that can mechanically lift the dollar in broad terms. However, the report also noted that the dollar later slipped back from its best level as data released in the U.S. came in mixed-to-soft.
Two key U.S. releases shaped the reversal. The report said the U.S. June ADP employment change increased by 98,000, below expectations of 120,000, suggesting slower labor momentum. In addition, the U.S. June ISM manufacturing index fell 0.7 to 53.3, weaker than expectations of 53.9. The ISM “prices paid” subindex declined 9.1 to a four-month low of 73.0, below expectations of 77.5.
In derivatives pricing, the report said swaps markets were discounting a 27% probability of a 25 basis point rate hike at the next FOMC meeting scheduled for July 28–29.
Euro pressure: inflation prints shift ECB expectations
In the currency market, the euro was a main source of downside pressure. The report said EUR/USD declined 0.37% as the dollar strengthened and as Eurozone inflation data signaled easing price dynamics.
According to the report, Eurozone June CPI slowed to 2.8% year-over-year from 3.2% in May, which was below expectations of 3.0%. Core CPI eased to 2.4% from 2.6%, also below expectations of 2.5%. While the Eurozone S&P manufacturing PMI was revised slightly higher to 51.4 from 51.3, the inflation surprise was described as the more direct catalyst.
The report further cited dovish communication from ECB President Christine Lagarde, who said risks to inflation and growth are now more broadly balanced than a few weeks earlier. Market pricing in the report indicated investors were discounting a 4% chance of a 25 basis point ECB rate hike at the next policy meeting on July 23.
Yen steadies after survey support, with intervention risk in focus
The yen saw a modest recovery after initially sliding to a new 39-year low. The report said USD/JPY was essentially flat on the day, down 0.01%, with the yen gaining slightly after Japan’s Q2 Tankan large manufacturing business conditions rose unexpectedly to an eight-year high of 22, above expectations for a decline to 16.
Still, the yen’s early weakness reflected softer data and concerns about the pace of Japanese policy normalization. The report said Japan’s June consumer confidence rose only 0.2 to 33.8, though that was below expectations of 34.1, and that June manufacturing activity was revised lower. Commentary cited in the report also suggested market participants remain uneasy that the Bank of Japan is “falling behind the curve” in tightening, after Deputy Governor Uchida indicated the BOJ would assess the economic impact of rate hikes and move slowly.
Intervention risk was highlighted as another factor to monitor. The report noted Japanese Finance Minister Satsuki Katayama said she spoke with U.S. Treasury Secretary Scott Bessent on Tuesday, and they agreed to take “bold” steps on currencies if needed, with both sides becoming “increasingly aligned” on foreign-exchange policy. With the yen reportedly above 160 per dollar at a 39-year low, the report said the risk of support measures in currency markets has increased, referencing prior instances when authorities intervened after the yen reached that level.
For BOJ expectations, the report said markets were pricing roughly a 3% chance of a 25 basis point rate hike at the July 31 policy meeting.
Gold and silver rebound on softer U.S. growth signals and safe-haven demand
COMEX metals extended gains after trading through early losses. The report said August gold closed up 43.90 (or 1.09%) and September silver closed up 0.589 (or 0.98%).
According to the report, the rally was driven by a more dovish interpretation of U.S. economic signals. Weaker-than-expected U.S. data—particularly the June ADP employment increase that missed expectations and a drop in the ISM manufacturing index—was described as easing inflation expectations and supporting the view that the Fed may not need to tighten as aggressively.
The report also tied metals to broader cross-asset developments. A decline in WTI crude oil to a 4.25-month low was cited as lowering inflation expectations, a factor that typically benefits precious metals. In addition, safe-haven flows were attributed to Middle East tensions, with the report saying Iran insists it controls traffic through the Strait of Hormuz, opposing views held by the U.S., Europe, and Gulf Arab nations.
Eurozone disinflation also added to the supportive backdrop. The report argued that the softer Eurozone CPI print could encourage an easier ECB policy path, which it said is bullish for precious metals.
At the same time, the report pointed to early headwinds. Precious metals initially moved lower alongside a stronger dollar and higher Treasury yields. It also said safe-haven demand cooled after a senior U.S. administration official reported that negotiators had positive discussions in Qatar and progress on technical talks with Iran.
Finally, the report cited ETF flows as another variable for investors to watch. It said long holdings in gold ETFs fell to a nine-month low after reaching a 3.5-year high on February 27, and silver ETF long holdings fell to an 11.25-month low after a 3.5-year peak on December 23—both potentially limiting upside even as other supports persist.
Despite those risks, central bank buying was cited as a stabilizing force. According to the report, China’s PBOC increased bullion in reserves by 320,000 ounces to 74.96 million troy ounces in May, marking the largest monthly increase in 17 months and the nineteenth consecutive month of reserve additions.
Investors will likely focus next on incoming inflation and labor-market data for signals on the Fed’s path, alongside additional Eurozone releases that could further influence ECB expectations. For FX, watch for developments around yen policy normalization and any updated statements on currency intervention risk, while commodity investors may track oil price action as a key input into inflation expectations.
