The dollar index (DXY00) on Thursday rose by +0.35%. The dollar found support from strong US interest rate differentials, as the 10-year T-note yield rose by +4 bp and posted a new 1.5-year high amid Thursday's surge in oil prices of more than +6%. The dollar also saw support from Thursday's US unemployment claims report, which showed a slightly stronger US labor market than market expectations.

The dollar also saw safe-haven demand after the Iran-backed Houthis launched a missile and drone attack on two Saudi Arabian oil tankers in the Red Sea, expanding the oil disruptions beyond the Strait of Hormuz and threatening oil shipments in the Red Sea. President Trump responded by saying he will hold Iran responsible for the Houthi attacks and telling Axios in an interview on Thursday that he is considering a "massive attack" that would be "bigger than ever before" and is "close to making a decision on it."

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The Houthis have vowed to blockade shipping linked to Saudi Arabia and warned shipowners against calling at the nation's ports. The move threatens Saudi oil exports from Yanbu, a Red Sea hub that the Saudi's are using to ship crude since the war brought shipping through the Strait of Hormuz to a near halt. Meanwhile, the US and Iran exchanged attacks for the 12th straight day, and the US maintained its blockade of Iranian oil shipments in the Persian Gulf.

The markets are discounting a 36% probability of a +25 bp rate hike at the next FOMC meeting on July 28-29.

EUR/USD (^EURUSD) fell -0.33% on dollar strength. However, the euro had underlying support as the 10-year German bund yield edged to a new 15-year high, illustrating the impact of rising oil prices and inflation fears.

The ECB at its policy meeting on Thursday left its key deposit rate unchanged at 2.25%, in line with market expectations. The ECB said it left rates unchanged, awaiting further data to determine whether additional rate hikes are necessary to address the inflation outlook. However, ECB President Christine Lagarde said, "Risks to the inflation outlook are to the upside." The markets are discounting a 92% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) is up +0.41% on dollar strength. The yen fell to a new 39-year low against the dollar, raising the risk of intervention in currency markets to support the yen. Japanese authorities have intervened in the forex market several times in the past when the yen surpassed 160 yen/USD, as it did Thursday.

The markets are discounting a +2% chance of a +25 bp BOJ rate hike at the next policy meeting on July 31.

August COMEX gold (GCQ26) on Thursday closed sharply lower by -101.70 (-2.45%), and September COMEX silver (SIU26) closed down -2.244 (-3.72%).

Gold and silver prices fell sharply amid the stronger dollar and rising US and European bond yields. However, precious metals prices had underlying safe-haven support after the Iran-backed Houthis attacked two Saudi Arabian oil tankers, spreading the Iran conflict to the Red Sea and threatening additional disruptions to global oil transportation.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 9.75-month low on Monday, after reaching a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 1-year low last Tuesday from the 3.5-year high posted on December 23.

Strong central bank demand for gold is supportive of gold prices, following news that bullion held in China's PBOC reserves rose by +480,000 ounces to 75.44 million troy ounces in June, the twentieth consecutive month the PBOC boosted its gold reserves.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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