Dollar Rallies and Gold Falls as T-note Yields Climb

Rich Asplund

Tue, May 19, 2026 at 3:34 PM EDT 4 min read

The dollar index (DXY00) on Tuesday rallied to a 6-week high, finishing up by 0.14%.  The dollar moved higher on Tuesday as higher T-note yields are strengthening the dollar’s interest rate differentials.  The 10-year T-note yield jumped to a 16-month high on Tuesday of 4.685%.  Also, weakness in stocks on Tuesday boosted liquidity demand for the dollar.  In addition, the ongoing US-Iran war is boosting demand for the dollar as a safe haven. The dollar added to its gains Tuesday on the stronger-than-expected Apr pending home sales report.

US Apr pending home sales rose +1.4% m/m, stronger than expectations of +1.0% m/m.  Also, Mar lending home sales were revised upward to +1.7% m/m from the previously reported +1.5% m/m.

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Swaps markets are discounting the odds at 6% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) fell to a 1.25-month low on Tuesday and finished down -0.45%.  The dollar’s strength on Tuesday weighed on the euro.  On the positive side for the euro was Tuesday’s hawkish comments from ECB Governing Council member Nagel, who said the ECB may “have to do something” at its June meeting if the Iran energy shock persists.

ECB Governing Council member and Bundesbank President Joachim Nagel said the ECB may “have to do something” at its June meeting amid the Iran energy shock, as the probability is rising that inflation will spread.

Swaps are discounting an 89% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) on Tuesday rose by +0.13%.  The yen slid to a 2.5-week low against the dollar on Tuesday amid strength in T-note yields.  Losses in the yen were limited after Tuesday’s stronger-than-expected Japan Q1 GDP report bolstered the chances of the BOJ raising interest rates. Also, the closer the yen falls to 160 per dollar, the greater the likelihood of Japanese authorities intervening in forex markets to prop up the yen, as they have done several times recently when the yen fell below that level.

Japan Q1 GDP rose +2.1% (q/q annualized), stronger than expectations of +1.7%.  The Q1 GDP deflator rose +3.4%y/y, stronger than expectations of +3.1% y/y.

The Japan Mar tertiary industry index fell -0.2% m/m, a smaller decline than expectations of -0.5% m/m.