The U.S. dollar index was little changed on the day as softer U.S. housing data weighed on the currency, while a sharp drop in crude oil added pressure through lower inflation expectations. Traders also turned attention to the start of a two-day Federal Open Market Committee meeting—the first chaired by Kevin Warsh—where investors will focus on the post-meeting outlook for inflation and the path of policy.
Key takeaways
- Dollar steady: The dollar index was little changed as weaker May housing starts and building permits undercut near-term rate expectations.
- Oil slide as a catalyst: A roughly 3% drop in WTI to a 3.25-month low contributed to lower inflation expectations, a headwind for the dollar.
- Fed spotlight: Investors will watch Warsh’s first FOMC communications for signals on inflation and future policy settings.
- FX divergence: The euro held modest gains supported by stronger German ZEW expectations, while the yen was slightly lower amid reduced safe-haven demand.
- Precious metals gain: Gold and silver prices rose as lower bond yields and a softer oil complex supported metals, despite some safe-haven demand easing after a U.S.-Iran development.
What drove the dollar’s lack of momentum
Several U.S. data points nudged the dollar lower in tone. According to the report, U.S. May housing starts fell 15.4% month over month to a six-year low of 1.177 million, versus expectations of 1.430 million. May building permits, a measure often used as a forward indicator for construction activity, declined 0.7% month over month to 1.413 million, also slightly below expectations of 1.418 million.
In contrast, the report said the U.S. May import price index excluding petroleum rose 0.8% month over month, stronger than expectations for 0.5%.
The currency also faced an external pressure point: oil. The report said WTI fell about 3% to a 3.25-month low. Lower crude prices typically reduce near-term inflation expectations, which can translate into expectations for a less restrictive Federal Reserve stance—generally a headwind for the dollar.
Additionally, there was some carryover from Monday’s development in geopolitics. The report said a U.S.-Iran agreement to end the war reduced safe-haven demand for the dollar earlier, leaving the currency without that same defensive bid.
FOMC focus shifts to Warsh’s first meeting
According to the report, the dollar’s main focus will shift to the two-day FOMC meeting beginning on the day, the first under new Fed chair Kevin Warsh. While the Fed is widely expected to keep interest rates unchanged, traders will look for how Warsh frames the post-meeting press conference and what it implies for the inflation outlook.
On positioning, the report said futures markets were pricing roughly a 4% probability of a 25 basis point rate cut hike at the conclusion of the Tuesday/Wednesday meeting.
For investors, the key dynamic is whether incoming communications and the inflation narrative can offset today’s softer growth impulse from housing and the inflation-disinflation signal from crude.
Euro and yen: supportive macro signals versus rate differential pressure
Euro: The euro rose modestly, up about 0.06%, though it remained below Monday’s one-week high, according to the report. Support came from Germany’s June ZEW survey. The report said expectations for economic growth rose by more than anticipated to a four-month high of 10.5, compared with expectations of -5.5. Separately, the report said Eurozone Q1 labor costs were revised lower to 3.2% year over year from 3.4% previously reported.
The report also linked the euro’s gains to the oil move, noting that a decline in crude prices can be supportive for the Eurozone because much of Europe’s energy is imported. However, gains appeared capped after the report said the 10-year German bund yield fell to an eight-week low of 2.92%, which weakens euro support from interest-rate differentials. The report added that markets were pricing about a 17% chance of a 25 basis point ECB rate hike at the July 23 meeting.
Yen: Against the dollar, the yen was slightly lower, with USD/JPY up around 0.05%, according to the report. A rally in Japanese equities—described as the Nikkei hitting a new all-time high—reduced demand for safe-haven assets like the yen. The report also pointed to pressure after the Bank of Japan signaled it was stopping the tapering of bond purchases.
Even so, the report said yen weakness was limited after the BOJ delivered as expected, raising interest rates by 25 basis points. It also cited support from the BOJ’s stance that it would continue raising rates in response to economic conditions and prices. The report said the BOJ voted 7-1 to raise the overnight call rate to 1.00% and keep bond buying steady at a monthly pace of around 2 trillion yen (about $12.5 billion) from April 2027.
Lower U.S. Treasury yields were also described as supportive for the yen, while today’s oil decline was flagged as helpful for Japan’s economy given heavy reliance on imported energy. The report said markets priced only around a 1% chance of another 25 basis point BOJ hike at the July 31 meeting.
Gold and silver edge higher as yields fall, but safe-haven demand fades
According to the report, August Comex gold was up about 2.60 (roughly 0.06%) and July Comex silver up around 0.030 (about 0.04%). Gains were attributed to lower global bond yields, which typically benefit precious metals, and to the oil decline, which the report said reduced inflation expectations and could prompt central banks to adopt easier policy.
The report also highlighted offsets. It said there was carryover from Monday after news that the U.S. and Iran agreed to a peace deal, which reduced safe-haven demand for metals. It further noted that the BOJ’s 25 basis point rate hike was viewed as a bearish factor for precious metals through the channel of tighter financial conditions.
On flows, the report cited fund liquidation as another pressure point, noting that gold ETF holdings fell to a 7.25-month low on Monday after reaching a 3.5-year high on February 27. It said silver ETF holdings dropped to a 10.5-month low on Monday from a 3.5-year high posted on December 23.
Still, the report said central bank buying supported gold. It referenced news that bullion held in China’s PBOC reserves rose by 320,000 ounces to 74.96 million troy ounces in May, the largest monthly increase in 17 months and the nineteenth consecutive month of reserve additions.
Bigger picture: oil, rates and the inflation narrative
Across currencies and commodities, the common thread was the shift in the inflation conversation. Softer U.S. housing data reduced growth momentum, while the oil slide pointed toward lower inflation expectations—together influencing how investors read the probability of future central bank moves. With the Fed meeting underway and a new chair in place, the near-term direction for the dollar is likely to hinge on how Warsh addresses inflation and policy on the day’s key communications.
For the rest of the session and into the next stage of the meetings, investors will also watch how bond yields react to FOMC messaging and whether crude’s decline continues to steer expectations for both U.S. and global policy. The next catalysts remain the outcome of the FOMC meeting and subsequent guidance from the Fed, as well as continued developments in oil-sensitive inflation expectations.
