The dollar index (DXY00) today rallied sharply to a 1-month high and is up by +1.30%. The dollar is surging today after the US and China agreed to temporarily lower tariffs on each other’s products. Also, today’s jump in the 10-year T-note yield to a 4-week high has strengthened the dollar’s interest rate differentials.  In addition, today’s soaring stock market and easing trade tensions reduce the chances the Fed will cut interest rates, a supportive factor for the dollar.  The dollar fell back from its best levels after Fed Governor Kugler said US tariff policies are likely to boost inflation and weigh on economic growth, even with the recently announced reduction to tariffs on China.

The US and China agreed to temporarily lower tariffs on each other’s products for three months, with the US reducing its tariffs on China from 145% to 30% and China reducing its duties from 125% to 10%.  Treasury Secretary Bessent Said that neither nation wants to “decouple” and that further talks might lead to “purchasing agreements” by China.

Fed Governor Kugler said US tariff policies are likely to boost inflation and weigh on economic growth, even with the recently announced reduction to tariffs on China.  She added that there could also be “significant effects” on productivity since businesses may cut back on investment and make other less efficient moves to navigate the tariffs.

The markets are discounting the chances at 8% for a -25 bp rate cut after the June 17-18 FOMC meeting.

EUR/USD (^EURUSD) today sank to a 1-month low and is sharply lower by -1.10%.  Today’s surge in the dollar index to a 1-month high has fueled long liquidation in the euro. Also, the euro has had some negative carryover from last Friday when ECB Governing Council members Simkus and Rehn said they favored an ECB interest rate cut at next month’s policy meeting.

Swaps are discounting the chances at 85% for a -25 bp rate cut by the ECB at the June 5 policy meeting.

USD/JPY (^USDJPY) today is up by +1.89%.  The yen fell sharply today to a 5-week low against the dollar on reduced safe-haven demand after the US and China agreed to reduce tariffs on each other’s goods.  Also, an easing of geopolitical tensions has curbed safe-haven demand for the yen after India and Pakistan agreed to an immediate ceasefire, and Ukraine President Zelenskiy said he would travel to Istanbul on Thursday for direct negotiations with Russian President Putin.  In addition, today’s economic news that showed the Japan Apr eco watchers outlook survey fell more than expected to a 4-year low is bearish for the yen. Finally, today’s surge in T-note yields is undercutting the yen.

The Japan Apr eco watchers outlook survey fell -2.5 to a 4-year low of 42.7, weaker than expectations of 44.6.

June gold (GCM25) today is down -101.90 (-3.05%), and July silver (SIN25) is down -0.084 (-0.26%).  Precious metals today are sharply lower, with gold and silver falling to 1-week lows. Today’s surge in the dollar index to a 1-month high is hammering precious metals prices.  Also, easing trade tensions has sparked long liquidation in precious metals after China and the US agreed to lower tariffs on each other’s goods.  In addition, an easing of global geopolitical risks is bearish for precious metals after India and Pakistan agreed to an immediate ceasefire, and Ukraine President Zelenskiy said he would travel to Istanbul on Thursday for direct negotiations with Russian President Putin.  Finally, today’s surge in global bond yields is undercutting precious metals prices. 

An increase in inflation expectations supports the demand for gold as an inflation hedge after today’s US 10-year breakeven inflation rate climbed to a 5-week high.  Losses in silver prices today are limited as the easing of trade tensions between the US and China supports economic growth prospects and is bullish for industrial metals demand.  Finally, geopolitical risks in the Middle East continue to support safe-haven demand for precious metals as the Israel-Hamas conflict continues and as Israel launched an airstrike on Houthi rebels in Yemen.