Bonds Down, Dollar Flat on Positive Sentiment

By John Lee

U.S. 10-year Treasury bonds continued pushing further into 3-month lows today, as traders bet that the Fed will not cut rates by the end of the year. Bonds have fallen continuously since the Fed announcement two weeks ago; key wording and use of the word "vigilance" hinted that the Fed was still more concerned about inflation than slowing growth, meaning that the central bank would not lower rates. Traders took this hawkish stance as a positive for the economy. Bonds typically rise on economic weakness and fall on strength.

The euro bounced back against the yen and dollar this morning, but gave up gains to close flat on the dollar and up just slightly over the yen. The euro hit new record highs against the yen before falling back some. This week, the dollar rallied strongly against the euro on more and more signs that the U.S. economy is turning itself around. The Fed kept key wording in its rate announcement two weeks ago, promising continued vigilance over inflation. The U. of Michigan sentiment index on Friday also came in stronger than expected, boosting the dollar. The Canadian dollar also stepped up to the dollar today, pushing back to recent near-yearly lows. The British pound surged today over the dollar, after minutes from the last BoE were released and showed a hawkish mentality amongst voting members.

Crude oil futures rose about 0.5% today, on speculation that summer demand will exceed refiner capacity and gasoline stockpiles. Despite a rise in gasoline reserves, U.S. gasoline stockpiles are about 7% lower than the 5-year average, heightening fears that the U.S. won't be able to handle the summertime surge. Summer is typically a period of high demand for energy, and prices usually rise during the season. Natural gas futures were down slightly on U.S. supplies.

Gold was basically flat, in line with the euro. Gold initially rose on euro strength, but as the dollar fought off losses, gold fell back to flat. Gold usually trades inversely to the dollar and with oil, and it was dollar action that dominated today's trading. Copper futures were up fractionally.

Grains traded mixed today. Soybeans rose about 1%, wheat rose 1% and corn dropped about 0.2%.

Economic News
No major economic news to report for the U.S. today.