Comex gold futures for August delivery slides 1.2% in European morning as the dollar strengthens against major currencies. Bullion holdings in SPDR gold trust stayed unchanged for a 4th day at 1132.15 metric tons. Sluggishness in investment demand increased the weight of dollar's impact on gold.
USD index gains +0.4% after Japan showed support on the dollar as the reserve currency and investors anticipated Treasury Secretary Timothy Geithner would deliver dollar-positive speech at the G-8 meeting.
Japan's Finance Minister Kaoru Yosano said that 'the USD's position as the world's reserve currency is not under threat' and the country's trust in 'US Treasuries is absolutely unshakable'. The comment definitely supported the dollar after Brazil and Russia said earlier this week that they may reduce US debts.
The comment by Russia's central bank that it will reduce the share of reserves invested in US Treasuries and buy multicurrency bonds issued by IMF was USD-negative as it put USD's reserve status once again in question.
IMF, an organization of 185 countries, has the authority to issue bonds directly to member countries or central banks to raise funds but it has never done so before. We believe if the bonds are to be issued by IMF, they will be denominated by a basket of currencies in SDRs. As of June 11, the percentage of currencies in SDRs breaks down as follows: 41% in USD, 37.2% in EUR, 12% in yen, and 9.6% in GBP while the breakdown of foreign exchange reserve held in Russia's central bank is 45% in USD, 44% in Euro, 1% in yen and 10% in pound. For more information about SDR, please click here.
The G-8 meeting will be held later today in Italy and the market expects Geithner to express his support for USD. Moreover, news about the Fed's stance for not boosting purchase of USD Treasury and mortgage-backed securities due to stabilization in economy also helped USD and it implied 'creation' of dollar will be lowered.
Crude oil price retreats to 71.6 as investors take profit and stocks in Europe pulls back. The Eurozone reported that industrial production declined -1.9% mom in April, worse than consensus of -0.4% and -1.4% a month ago. On annual basis, the gauge contracted -21.6%, after falling -19.3% in March. UK's FTSE 100 index plunges -0.1% while Germany's DAX slides 0.4%. France's CAC 40 stays flat.
After upward revisions in global oil demand by both the US Energy Department and International Energy Agency, we believe OPEC will likely to the same next week. This should boost market sentiment and support recent rally in oil price. However, we remain cautious about strength in oil as recent data showed that consumption continued to hover at multi-year low.