The dollar index (DXY00) rallied to a 1.5-week high on Wednesday, finishing up by 0.22%. The dollar moved higher on Wednesday on the stronger-than-expected US Apr PPI report, which was hawkish for Fed policy. The dollar also has safe-haven support on concerns that the US-Iran ceasefire may break down after President Trump said the current ceasefire was on “life support.” In addition, Wednesday’s jump in the 10-year T-note yield to a 10-month high of 4.49% strengthens the dollar’s interest rate differentials.
US Apr PPI final demand rose +1.4% m/m and +6.0% y/y, stronger than expectations of +0.5% m/m and +4.8% y/y, with the +6.0% y/y jump being the largest increase in 3.25 years. Also, Apr PPI ex-food and energy rose +0.6% m/m and +5.2% y/y, stronger than expectations of +0.3% m/m and +4.3% y/y, with the +5.2% y/y gain being the largest increase in 3.25 years.
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Swaps markets are discounting the odds at 3% for a 25 bp rate cut at the next FOMC meeting on June 16-17.
EUR/USD (^EURUSD) on Wednesday fell by -0.26%. Wednesday’s stronger dollar weighed on the euro. The euro was also under pressure from Wednesday’s Eurozone economic reports, which were dovish for ECB policy.
Eurozone Mar industrial production rose +0.2% m/m, slightly weaker than expectations of +0.3% m/m.
The French Q1 mainland unemployment rate rose +0.2 points to a 5-year high of 7.9%, showing a weaker labor market than expectations of 7.8%.
ECB Governing Council member Olli Rehn warned that recent data are starting to point to stagflation as a result of the Iran war and rising energy prices, saying, “The first signs were already visible in the statistics, when growth in the Eurozone in the first quarter was only slightly positive, and inflation accelerated to 3%.”
Swaps are discounting an 84% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.
USD/JPY (^USDJPY) on Wednesday rose by +0.16%. The yen was under pressure on Wednesday from a stronger dollar. Also, the April Eco Watchers Outlook Survey rose less than expected, a negative factor for the yen. Higher Japanese government bond yields are supportive for the yen after the 10-year JGB bond yield rose to a 29-year high of 2.60% on Wednesday.
The Japan Apr Eco Watchers Outlook survey rose +0.7 to 39.4, weaker than the 40.9 expected.
