The Dollar Index (DXY00) rose to a 1.5-week high on Wednesday and ended with a gain of 0.22%. The dollar rose on Wednesday following the better-than-expected US April PPI report, which set a hawkish tone for Federal Reserve policy. The dollar is also supported as a safe haven amid concerns that the US-Iran ceasefire could break down after President Trump said the current ceasefire was on “life support.” Additionally, Wednesday’s jump in the 10-year Treasury yield to a 10-month high of 4.49% strengthens dollar interest rate differentials.
US April PPI final demand rose +1.4% MoM and +6.0% YoY, stronger than expectations of +0.5% MoM and +4.8% YoY, with the +6.0% YoY jump being the largest increase in 3.25 years. Additionally, the April PPI excluding food and energy rose +0.6% MoM and +5.2% YoY, stronger than expectations of +0.3% MoM and +4.3% YoY, with the +5.2% YoY increase being the largest increase in 3.25 years.
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Swap markets are pricing in the odds of a 25bp rate cut at the next FOMC meeting on June 16-17 at 3%.
EUR/USD (^EURUSD) fell -0.26% on Wednesday. Wednesday’s dollar strength weighed on the euro. The euro was also under pressure from Wednesday’s eurozone economic reports, which were dovish for ECB policy.
Eurozone industrial production in March rose +0.2% mom, slightly below expectations of +0.3% mom.
The first quarter unemployment rate in mainland France rose +0.2 points to a five-year high of 7.9%, showing a weaker labor market than expectations of 7.8%.
Olli Rehn, a member of the ECB Governing Council, warned that recent data is 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%.”
The swaps price in an 84% probability of a +25bp rate hike by the ECB at the next monetary policy meeting on June 11.
USD/JPY (^USDJPY) on Wednesday rose +0.16%. The yen came under pressure on Wednesday from a stronger dollar. Additionally, the Eco Watchers outlook survey for April rose less than expected, a negative factor for the yen. Higher Japanese government bond yields support 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.