US Dollar Falls as Metals Show Mixed Performance

What's Happening with the US Dollar?

The US dollar index has fallen for six consecutive trading sessions, reaching 97.05 (with an intraday low of 96.97) as of mid-afternoon trading. This marks the lowest level for the greenback since March 2022, continuing a significant downward trend that has captured market attention worldwide.

Dollar Hits Lowest Point Since March 2022

This six-day decline represents the dollar's longest losing streak in over 14 months, with the currency losing approximately 2.3% of its value during this period. The Dollar Index (DXY), which tracks the greenback against a basket of six major currencies including the euro, yen, and pound, has now retraced nearly all of its 2024 gains.

"Markets are betting the US Fed will deliver more interest rate cuts, and possibly sooner than previously expected, as recent US data indicates a weakening economy," notes the latest SMM analysis report.

This decline is particularly significant as it comes despite ongoing geopolitical tensions and economic uncertainties that traditionally strengthen the dollar as a safe-haven currency.

Why the Dollar is Weakening

Recent economic data has reinforced expectations of more aggressive Federal Reserve rate cuts. Consumer spending in the United States unexpectedly declined 0.3% in May as the pre-tariff hike buying surge for automobiles and other goods faded. This follows April's revised 0.6% increase, indicating a significant shift in consumer behavior.

With inflation remaining mild (Core PCE price index up just 2.6% year-over-year in May), market participants have adjusted their expectations dramatically. Traders now anticipate approximately 65 basis points of US inflation and tariffs by year-end—up significantly from the 46 basis points projected just a week earlier.

Key drivers behind the dollar's weakness include:

• Narrowing interest rate differentials as markets price in Fed easing
• Declining real yields on US Treasury securities
• Shifting investor sentiment toward non-dollar assets
• Resilient economic data from Europe and parts of Asia

The dollar's decline is being closely monitored by commodity traders, as dollar-denominated assets typically exhibit an inverse price relationship with the currency's strength.

How Are Metals Markets Responding?

The metals markets showed varied responses to the weakening dollar, with performance diverging across different segments and geographies. While a weaker dollar typically supports commodity prices by making them less expensive for non-dollar buyers, fundamental factors continue to exert significant influence on individual metals.

Mixed Performance in Base Metals

Most domestic base metals posted modest gains as the dollar weakened. SHFE zinc led domestic base metals with a 0.31% increase, while SHFE tin was the only decliner, falling 0.6%. International markets reflected similar mixed performance, with LME lead rising 0.24% and LME aluminum gaining 0.12%.

The limited upside in base metals despite dollar weakness suggests that market participants remain cautious about broader economic conditions, particularly regarding China's iron ore demand trends outlook.

Base Metals Performance Summary

Notable Movements in Specialty Metals

Several specialty metals showed significant price movements, bucking the general trend of modest changes in industrial metals:

• Polysilicon surged 4.55%, marking its third consecutive day of gains. This rally has been fueled by improving demand from the solar energy sector, with China's Q2 solar installations increasing approximately 15% year-over-year according to preliminary industry data.

• Silicon metal jumped 2.94%, continuing its upward trend for the fifth straight trading session. The sustained rally reflects both strengthening semiconductor demand and supply constraints caused by power rationing in Yunnan province, a key production hub.

• Lithium carbonate declined 0.77%, continuing its multi-month downtrend amid persistent oversupply concerns. Recent production cuts announced by major producer SQM have yet to meaningfully impact prices.

• European shipping contracts fell 1.92%, reflecting concerns about global trade volumes and container demand.

The pronounced strength in solar-related materials (polysilicon and silicon metal) highlights how sector-specific dynamics can override broader market trends, even during periods of significant US dollar falls and metals mixed performance.

What's Happening in Ferrous Metals?

The ferrous metals segment has shown resilience despite broader market uncertainties, with most steel products posting gains while coal-related commodities faced pressure. This divergence points to the complex supply-demand dynamics currently shaping the ferrous metals landscape.

Steel Products Show Strength

The steel subsector demonstrated relative strength across most products:

• Hot-rolled coil (HRC) increased by 0.21%, supported by steady construction activity
• Rebar posted a gain of 0.23%, benefiting from infrastructure project developments
• Stainless steel rose 0.16%, finding support from nickel price stability

This strength comes as operating rates at steel mills in China's key Tangshan production hub have climbed to approximately 78% in June, up from 70% in May, according to industry sources. The improvement coincides with Beijing's recent infrastructure stimulus measures, with project approvals in June reportedly rising 12% month-over-month.

Key steel demand drivers include:

• Acceleration in infrastructure construction projects
• Stabilizing real estate completion rates (though new starts remain weak)
• Modest automotive production growth
• Seasonal construction activity

Coal Products Under Pressure

In contrast to the strength in steel products, coal-related commodities faced downward pressure:

• Coking coal fell 1.08%, its fourth decline in five sessions
• Coke declined 0.46%, reflecting weakening margins for coke producers

The weakness in coal products stems primarily from increased supply availability, with Indonesian coal exports rising approximately 9% month-over-month in May according to customs data. Additionally, improved hydropower generation in southwestern China has reduced thermal coal demand for electricity generation, allowing more coal to be directed toward metallurgical applications.

The divergence between steel and coal prices bears watching, as sustained pressure on coking coal costs could eventually support steel mill profitability if steel product prices remain stable.

How Are Precious Metals Performing?

Precious metals markets showed a clear divergence between domestic and international performance, highlighting regional differences in investor sentiment and market dynamics. This split performance reflects the complex interplay of currency movements, interest rate expectations, and local demand factors.

Divergence Between Domestic and International Markets

International Precious Metals

• COMEX gold rose 0.46%, finding support from dollar weakness and expectations of Fed rate cuts
• COMEX silver gained 0.15%, moving in tandem with gold but with more subdued momentum

International precious metals have benefited from the weakening dollar and declining Treasury yields, as these developments reduce the opportunity cost of holding non-yielding assets like gold and silver. The COMEX gold price has now recovered most of its losses from earlier in the quarter, continuing its path toward all-time high gold analysis.

Domestic Precious Metals

• SHFE gold fell 0.63%, bucking the international trend
• SHFE silver declined 0.54%, moving in line with local gold prices

The weakness in domestic precious metals markets stands in contrast to international trends, with the COMEX-SHFE spread widening to approximately $22/oz as of June 30, compared to $18/oz at the beginning of the month. This divergence primarily reflects local factors, including:

• The People's Bank of China (PBOC) maintaining unchanged gold reserves at 2,250 tonnes in June
• Relatively muted physical gold demand during the traditional summer lull
• Different trading hours and investor composition between markets

The gold-silver ratio remains elevated at approximately 78:1, well above its long-term historical average of around 60:1, suggesting silver remains undervalued relative to gold by historical standards.

What's the Latest on China's Manufacturing Sector?

China's manufacturing sector has shown signs of stabilization after months of uneven performance, with June data indicating modest improvement across several key metrics. This stabilization comes as policymakers continue to implement targeted stimulus measures to support industrial activity.

Manufacturing PMI Shows Improvement

China's manufacturing sector demonstrated signs of recovery in June, with the Manufacturing Purchasing Managers' Index (PMI) rising to 49.7%, marking a 0.2 percentage point increase month-over-month. This represents the second consecutive monthly improvement, suggesting stabilizing conditions in the manufacturing sector.

The PMI survey, which polls approximately 3,000 manufacturers across China, remains slightly below the 50% threshold that separates expansion from contraction. However, the continued improvement suggests the sector may be approaching a turning point after several challenging quarters.

"Market demand has halted its decline with the new orders index returning to expansion territory after two consecutive months below the threshold," noted the joint NBS/CFLP release accompanying the data.

Broadening Expansion Across Industries

Among the 21 industries surveyed, 11 operated in expansion territory—four more than in the previous month. This broadening of growth across different sectors indicates improving resilience in China's manufacturing base.

Industries showing the strongest performance included:

• Automotive manufacturing (PMI: 51.4%, up from 48.9% in May)
• Computer and electronic equipment (PMI: 51.2%)
• Agricultural processing (PMI: 50.8%)
• Pharmaceuticals (PMI: 50.6%)

The improving breadth of expansion is particularly encouraging as it suggests the recovery is becoming more broadly based rather than concentrated in a few sectors.

Market Demand Stabilization

The new orders index returned to expansion territory at 50.2% after two months below the 50% threshold, signaling a halt in declining market demand. This improvement in new orders typically leads production activity by 1-2 months, suggesting potential production increases in the coming period.

Simultaneously, manufacturing export orders showed recovery, with the new export orders index rising for two consecutive months to reach 48.7%. While still in contraction territory, the continued improvement suggests stabilizing external demand despite global economic uncertainties.

The employment sub-index remained challenged at 48.1%, indicating ongoing pressure on manufacturing jobs. However, this represents a slight improvement from May's 47.8%, suggesting the pace of job losses may be moderating.

What's Happening in the Oil Market?

The oil market continues to face downward pressure despite the dollar's weakness, with both benchmark crude prices declining amid a complex mix of supply increases and demand uncertainties. Traditionally, a weaker dollar supports oil prices by making the dollar-denominated commodity less expensive for buyers using other currencies.

Crude Oil Prices Under Pressure

Both WTI and Brent crude oil prices declined, with WTI down 0.56% and Brent falling 0.33%. This downward pressure comes amid easing geopolitical tensions in the Middle East and persistent uncertainties about global oil demand.

"Markets have largely priced out geopolitical risk premiums following the Iran-Israel ceasefire," notes Tony Sycamore, IG Market Analyst.

"Global economic uncertainties continue to weigh on prices," adds Priyanka Sachdeva of Phillip Nova.

The decline comes despite the dollar's weakness, which would typically provide some support for crude prices. This suggests underlying concerns about demand fundamentals are currently outweighing currency effects.

OPEC+ Production Increases on the Horizon

Market analysts note that geopolitical risk premiums have largely been priced out following the Iran-Israel ceasefire. OPEC+ delegates have indicated the alliance will likely announce another substantial production increase of 411,000 barrels per day in August, continuing their strategy to regain market share.

If approved at the upcoming meeting, this would bring the group's year-to-date supply expansion to 1.78 million barrels per day, equivalent to over 1.5% of global demand. This continued output growth comes as OPEC+ compliance with existing quotas has weakened, with June production approximately 260,000 barrels per day below target according to preliminary IEA estimates.

The production increases reflect OPEC+'s shifting strategy from price support to market share preservation, particularly as US shale activity has moderated.

US Rig Count Continues to Fall

US energy companies reduced oil and gas rig counts for the fourth consecutive month, bringing the total to the lowest level since October 2021. The US oil and gas rig count—a leading indicator for future production—dropped by 7 to 547 in the week ending June 27, marking a 34-rig (6%) year-over-year decline.

This continued reduction in drilling activity suggests US production growth may moderate in late 2025 and early 2026, as rig count changes typically impact production with a 3-6 month lag. The decline reflects both capital discipline among producers and investor pressure to prioritize returns over production growth.

The US strategic petroleum reserve (SPR) remains at historically low levels around 369 million barrels, approximately 40% below its 2020 peak, limiting the government's ability to respond to potential supply disruptions.

What Key Economic Indicators Should Investors Watch?

As market volatility increases amid shifting monetary policy expectations and economic uncertainty, several key economic indicators warrant close attention from investors. These data points could significantly influence both currency and commodity markets in the coming days.

Important Economic Releases Today

Several significant economic indicators are scheduled for release today, including:

• UK Q1 GDP final readings (production-based, annual and quarterly)
• Germany's May real retail sales data (monthly and yearly rates)
• Switzerland's May official reserve assets
• Germany's June seasonally adjusted unemployment rate
• Eurozone's May seasonally adjusted M3 money supply annual rate
• Germany's June CPI preliminary annual rate
• US June Chicago PMI

Among these, the US Chicago PMI holds particular significance for commodity markets as it provides insight into manufacturing activity in the Chicago region. The previous reading of 48.7 indicated contraction, and markets will be watching closely for signs of improvement or further deterioration.

The Chicago PMI survey polls approximately 200 manufacturing executives about business conditions, with readings above 50 indicating expansion and below 50 signaling contraction. The index has historically shown a moderately strong correlation with the broader ISM Manufacturing PMI.

Central Bank Communications

Market participants should also note that 2027 FOMC voter and Atlanta Fed President Raphael Bostic will be speaking about the US economic outlook, which could provide additional insights into potential monetary policy directions.

Bostic's recent communications have emphasized a data-dependent approach to monetary policy, suggesting the Fed will closely monitor economic indicators before determining the timing and pace of interest rate adjustments. As a voting member in 2027, his views offer a longer-term perspective on the Fed's policy trajectory.

Investors should pay particular attention to any comments regarding:

• The appropriate pace of potential rate cuts
• The Fed's assessment of current inflation trends
• The impact of recent consumer spending weakness on policy decisions
• The potential long-term neutral interest rate

These economic releases and central bank communications could trigger significant market movements, particularly in currency markets that have already shown heightened volatility.

FAQ: Understanding Current Market Dynamics

Why is the US dollar falling despite economic uncertainties?

The dollar's decline primarily reflects changing expectations about Federal Reserve policy. Recent economic data suggesting weakness in consumer spending has increased market expectations for more aggressive interest rate cuts, which typically weakens a currency as yield advantages diminish.

The dollar has traditionally served as a safe-haven currency during periods of uncertainty, but the prospect of Fed easing has outweighed this factor. Markets are now pricing in approximately 65 basis points of rate cuts by year-end, significantly more than the 46 basis points expected just a week ago.

Additionally, improving economic data from Europe and parts of Asia has strengthened other major currencies relative to the dollar, contributing to the greenback's broad-based decline.

How does a weaker US dollar typically affect metal prices?

A weaker dollar generally supports metal prices as it makes dollar-denominated commodities less expensive for buyers using other currencies. However, this relationship can be complicated by other factors such as supply-demand fundamentals and broader economic concerns.

Historical correlation studies from the Federal Reserve Bank of St. Louis show that the relationship between the dollar and commodity prices is strongest during periods of significant dollar movements (changes exceeding 5% over 30 days). The current six-day decline falls below this threshold, which may explain the relatively muted response in some metal prices.

The relationship also varies by metal type:

• Industrial metals (copper, aluminum) typically show stronger inverse correlations with the dollar
• Precious metals (gold, silver) often exhibit the strongest dollar sensitivity
• Specialty metals (lithium, silicon) are more influenced by industry-specific supply-demand factors

In the current environment, fundamental factors like China's manufacturing outlook appear to be exer

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