Possible EU-US Trade Deal Weighs on the Dollar

The dollar fell to a two-week low, weighed by weaker-than-expected US existing home sales, which hit a nine-month low, and improved prospects for a US-EU trade agreement. Concurrently, the euro rose to a two-week high on EU-US trade optimism and stronger consumer confidence, while the yen gained against the dollar following the US-Japan trade agreement and hawkish BOJ comments suggesting a potential rate hike. This broad easing of trade tensions, alongside rising bond yields and a record S&P 500, subsequently drove down precious metals as safe-haven demand diminished.

Analysis

The US dollar (DXY) declined to a two-week low, pressured by a confluence of negative domestic data and improving international trade sentiment. US existing home sales fell 2.7% month-over-month to a nine-month low, substantially weaker than the -0.7% consensus, signaling potential softness in the US economy. This weakness, coupled with market pricing that indicates a 58% probability of a Federal Reserve rate cut by September, overshadowed initial dollar support from rising T-note yields. Concurrently, the euro strengthened to a two-week high against the dollar, buoyed by reports that the US and EU are nearing a trade agreement with a 15% tariff, a more favorable outcome than the threatened 30%. This was further supported by a stronger-than-expected rise in the Eurozone consumer confidence index. In Asia, the yen also gained, driven by the finalized US-Japan trade deal and notably hawkish comments from BOJ Deputy Governor Uchida, which pushed the 10-year JGB yield to a 16-year high and signaled a move toward rate hikes. This broad easing of trade tensions created a risk-on environment, propelling the S&P 500 to a record high and consequently reducing safe-haven demand for precious metals. Gold and silver retreated from multi-week highs as rising global bond yields and equity strength prompted long liquidation, despite continued support from ETF inflows and geopolitical risks.

Key Decisions for Investors

• Given the weaker-than-expected US housing data and increasing market odds of a Fed rate cut in September, investors should be cautious of further US dollar strength and monitor upcoming FOMC guidance closely.
• The hawkish shift from the Bank of Japan, evidenced by Deputy Governor Uchida's comments and a 16-year high in JGB yields, presents a potential catalyst for yen appreciation; consider the risks of being short the yen against the dollar.
• Re-evaluate long positions in precious metals, as the reduction in trade-related risk and record-high equity markets are creating significant headwinds for safe-haven assets, potentially outweighing support from ETF holdings.
• The resolution of the US-Japan trade dispute, which includes a $550 billion Japanese investment fund for the US and a purchase agreement for 100 Boeing aircraft, presents a positive catalyst for specific US sectors and companies like Boeing (BA).