The U.S. dollar weakened on Tuesday, with the dollar index falling 0.12%, as softer U.S. housing data reduced support for the currency and a sharp drop in crude oil fed expectations of lower inflation. The move comes as the Federal Reserve’s two-day meeting enters its final phase, with investors focused on how new Fed Chair Kevin Warsh handles guidance on inflation during the post-meeting press conference.
Across major currencies, the euro edged higher, while the yen drifted slightly upward despite a still-supportive backdrop from the Bank of Japan’s recent rate decision. In commodities, gold finished higher while silver closed lower, with both metals reacting to changes in bond yields and shifting expectations around central-bank policy.
Key takeaways
- Dollar index fell 0.12%: Weaker U.S. housing starts and permits pressured the currency.
- Oil dropped 5%: WTI’s slump to a 3.5-month low weighed on inflation expectations, which also undermined the dollar.
- Fed focus next: Investors look to the Fed meeting for clues on the inflation outlook under new Chair Kevin Warsh.
- Euro gained modestly: Support came from improving German growth expectations and lower energy prices, though bond-yield moves capped gains.
- Gold rose, silver fell: Precious metals ended mixed as central-bank policy expectations and ETF flows shifted.
What drove the dollar lower
U.S. May housing starts fell 15.4% month over month to 1.177 million, missing expectations of 1.430 million. May building permits, viewed as a forward indicator for construction activity, declined 0.7% to 1.413 million versus expectations of 1.418 million. Together, the data undercut the dollar by pointing to softer growth momentum.
Tuesday also brought a large oil selloff, with WTI crude down 5% to a 3.5-month low. The report said that lower crude prices can reduce inflation expectations, which can lead markets to price a less restrictive Fed path—an additional headwind for the U.S. currency. The dollar also faced negative carryover from Monday, when the U.S. and Iran announced a deal aimed at ending the war, which reduced safe-haven demand for the dollar.
Market reaction: euro and yen diverge
EUR/USD rose 0.18% on Tuesday, though it remained below Monday’s one-week high. The euro found support after the German ZEW survey expectations of economic growth rose more than expected to a 4-month high. The report said expectations rose by 20.7 to 10.5 versus expectations of -5.5.
Additional support for the single currency came from crude’s decline, which can benefit energy-importing economies in the euro zone. However, gains were limited after the 10-year German bund yield slid to an 8-week low of 2.92%, weakening euro rate differentials. The report also noted euro zone Q1 labor costs were revised down to 3.2% year over year from 3.4% previously reported.
USD/JPY rose 0.04%, reflecting only slight yen weakness. The report attributed the yen’s softness partly to risk sentiment after the Nikkei Stock Index rallied to a new all-time high, which reduced demand for safe havens. It also said yen pressure was tempered by the Bank of Japan’s stance, including the impact of lower Treasury yields on Tuesday and the macro sensitivity of Japan’s economy to cheaper imported energy.
BOJ rate hike and Fed meeting in focus
Japan’s central bank raised the overnight call rate by 25 basis points to 1.00%, as expected, and indicated it would keep lifting rates in response to the economy and prices. The report said the BOJ voted 7-1 for the hike and also kept bond buying steady at a monthly pace of around 2 trillion yen ($12.5 billion) from April 2027. It added that Deputy Governor Shinichi Uchida, speaking in place of the ailing Governor Kazuo Ueda, said the basic approach is to continue raising policy interest rates while adjusting the degree of monetary easing.
On the U.S. side, the dollar’s next catalyst is the two-day Federal Open Market Committee meeting that began Tuesday and will culminate in a decision expected to keep interest rates unchanged. The report emphasized that the focus will shift to how Warsh navigates the post-meeting press conference and the outlook for inflation.
In derivatives pricing cited in the report, swaps markets were discounting a 5% chance of a 25 basis point rate cut hike at the conclusion of the Tuesday/Wednesday meeting. For the BOJ’s next decision, the report said markets were pricing a 1% chance of another 25 basis point increase at the July 31 meeting.
Gold up, silver down as yields and oil shift
COMEX August gold settled up 2.80, or 0.06%, while COMEX July silver closed down 0.167, or 0.24%. According to the report, precious metals were supported by lower global bond yields and by the oil drop lowering inflation expectations. Softer inflation expectations can tilt markets toward easier monetary policy, which typically benefits non-yielding assets like gold.
The report also pointed to factors that limited gains. It cited carryover from Monday’s U.S.-Iran peace deal, which reduced safe-haven demand for metals. It also noted the BOJ’s 25 basis point hike was bearish for precious metals. For industrial metals, the weaker-than-expected U.S. housing data was described as a negative input for demand expectations.
Investment flows added another layer. The report said recent fund liquidation weighed on the complex: long holdings in gold ETFs fell to a 7.25-month low on Monday after reaching a 3.5-year high on February 27. Long holdings in silver ETFs fell to a 10.5-month low from the 3.5-year high posted on December 23.
Despite that, central bank demand supported gold. The report cited 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 additions.
Bigger picture: positioning ahead of policy signals
Tuesday’s currency and metals moves reinforced a theme investors are watching closely: how quickly changing inflation expectations translate into central-bank rate paths. Oil’s sharp fall, combined with weak U.S. housing indicators, leaned bearish on the dollar by lowering growth and inflation narratives at the same time.
With the Fed meeting underway and a leadership transition now part of the market’s baseline, investors are likely to scrutinize the inflation framing and the credibility of the policy outlook rather than just the headline rate decision.
Next, market participants will focus on the Federal Reserve’s final decision and Warsh’s press conference for guidance on inflation. Attention will also remain on upcoming macro releases and central-bank communications in Europe and Japan, as currency moves are likely to stay sensitive to shifting rate differentials and bond yield trends.
