The dollar index (DXY00) Wednesday fell by -0.43%.  The dollar erased an overnight rally and turned lower after Wednesday’s Fed-friendly US May CPI report bolstered expectations for the Fed to cut interest rates later this year.  Also, the wider-than-expected US May federal budget deficit was bearish for the dollar since it implies that more capital needs to be imported to cover the budget deficit.  In addition, Wednesday’s drop in T-note yields weakened the dollar’s interest rate differentials.  The dollar on Wednesday initially moved higher after US-China trade talks ended with a plan to revive the flow of sensitive goods. 

US May CPI rose +2.4% y/y, right on expectations.  May CPI ex-food and energy rose +2.8% y/y, unchanged from April and a smaller increase than expectations of +2.9% y/y.

The US May federal budget deficit widened to a 6-month high of -$316.0 billion, a larger deficit than expectations of -$314.0 billion.

The markets are discounting the chances at 0% for a -25 bp rate cut after the June 17-18 FOMC meeting.

EUR/USD (^EURUSD) Wednesday rose by +0.53% and posted a 1-1/2 month high. The euro rallied on Wednesday due to weakness in the dollar.  The euro also garnered support from the ECB’s higher-than-expected estimate for Q4 2025 Eurozone wage growth, a hawkish factor for ECB policy.

The ECB’s wage tracker predicts Q4 2025 wage growth in the Eurozone rising +1.7% y/y, above expectations of +1.6% y/y but well below the +5.4% y/y in Q4 2024.

Swaps are discounting the chances at 12% for a -25 bp rate cut by the ECB at the July 24 policy meeting.

USD/JPY (^USDJPY) Wednesday fell by -0.21%.  The yen recovered from a 1-1/2 week low against the dollar Wednesday and turned higher after Japan’s finance ministry dampened speculation that it will buy back long-term government bonds as soon as next month. Gains in the yen accelerated after T-note yields fell on a dovish US May CPI report.  The yen on Wednesday initially moved lower after Japan’s May PPI rose less than expected, a dovish factor for BOJ policy.

Japan May PPI eased to +3.2% y/y from +4.1% y/y in Apr, weaker than expectations of +3.5% y/y.

Japan’s finance ministry dampened speculation that it will buy back long-term government bonds as soon as next month, stating that the market’s speculation about Japanese government debt buybacks from July is unrealistic and not envisioned.

August gold (GCQ25) Wednesday closed up +0.30 (+0.01%), and July silver (SIN25) closed down -0.381 (-1.04%).  Precious metals on Wednesday settled mixed.  Wednesday’s weaker dollar was supportive of precious metals.  Also, Wednesday’s dovish US May CPI report bolstered expectations for the Fed to cut interest rates, which boosts demand for precious metals as a store of value.  In addition, central bank demand for gold is supporting prices after the ECB reported that the share of gold in global foreign reserves rose to 20% at the end of 2024, the second largest asset in central bank reserves after the dollar. Finally, precious metals prices have continued safe-haven support from global trade tensions and geopolitical tensions in Ukraine and the Middle East. 

Gold prices jumped more than $20 an ounce Wednesday afternoon in after-hours trading on safe-haven demand when Reuters reported that the US embassy in Iraq is preparing to be evacuated because of rising security risks. 

Gains in precious metals were limited Wednesday after the US-China ended trade talks with a plan to revive the flow of sensitive goods, reducing safe-haven demand for precious metals.  Precious metals were also undercut by Wednesday’s hawkish statement from Japan’s finance ministry that said the market’s speculation about Japanese government debt buybacks from July is unrealistic.