• Dollar comes back to life after Michigan data and hawkish Fed remarks

• Rising yields inflict damage on Japanese yen, but gold finds dip buyers

• Demand concerns haunt oil prices, Turkish lira sinks after elections

Dollar reawakens 

After getting battered and bruised for several months now, the US dollar might be on the cusp of a comeback. The greenback staged a furious recovery last week, drawing fuel from its safe-haven qualities as risk sentiment turned sour and from some survey data that cast doubt on the popular notion that the Fed will cut interest rates soon.

Long-term inflation expectations in the Michigan consumer survey rose in May, hitting the highest levels in over a decade and underscoring the risk that the Fed has not slayed the inflation dragon yet. The dollar edged higher in the wake of this dataset on Friday while stock markets crawled lower, as traders started to flirt with the idea that there could be another Fed rate increase in June.

Even though the market-implied probability of a June rate increase stands at a mere 12%, that number might understate its true likelihood in the eyes of FOMC officials. Fed Board Governor Bowman gave a speech last week where she stressed that the latest CPI and employment reports did not provide consistent evidence that inflation is on a downward path, which suggests “additional policy tightening will likely be appropriate”.

Investors brushed aside the hawkish remarks from Bowman, but there is a litany of Fed speakers on the schedule this week and if they echo a similar tone, the probability of a June rate increase could keep rising, helping the dollar to extend its gains. We will hear from Goolsbee, Bostic, Kashkari, and Barkin later today.

Yen feels the heat, gold resilient

With the Fed contemplating another rate increase while the Bank of Japan insists it is too early to follow suit, the yen has come back under pressure, smothered under the weight of widening interest rate differentials.

Still, there is a ray of hope for the yen in the form of inflation releases this Friday. Japanese inflationary pressures likely continued to heat up in April, mirroring the forward-looking Tokyo CPIs. If this trend is reflected in the nationwide data, speculation for BoJ tightening this year could get a second wind, breathing life back into the yen.

In a striking show of strength, gold prices are trading higher on Monday, defying the spike higher in US yields. The metal’s popularity blossomed in recent months as bank failures fueled demand for protective assets and convinced investors that a Fed easing cycle is imminent, pushing bullion towards record highs.

The problem is that market pricing around Fed rate cuts seems overblown. Gold is currently trapped in a sideways range between $1975 and $2050, and if Fed officials this week are successful in convincing investors that a June rate increase is in play, the next move might be towards the lower boundary of this range.

Oil licks wounds, Turkish lira hits record low

In the energy arena, oil prices closed lower for a fourth consecutive week on Friday. Despite news that from June onwards, the US government might flip into a net-buyer of crude to replenish the Strategic Petroleum Reserve, oil prices still got hammered, most likely because of demand concerns as the Chinese reopening boom seems to be fading.

Finally in Turkey, with almost all the votes counted, no candidate has managed to exceed the 50% threshold, meaning there will be a second election round in two weeks. The Turkish lira fell to a new record low against the US dollar in the aftermath, as President Erdogan’s surprisingly strong performance raised the odds that artificially low interest rates will be a phenomenon that persists moving forward.