The U.S. dollar extended its rally for a fifth consecutive session on Friday, pushing gold to its lowest level in over a week and sending the euro to a five-week trough. The greenback's strength came amid a sharp jump in Treasury yields and higher oil prices, which together fueled speculation that the Federal Reserve may keep interest rates elevated for longer.
The euro slipped to $1.1623, its weakest point in five weeks, while the dollar index added 0.32% to 99.27, briefly touching 99.302. Against the yen, the dollar rose to 158.74, keeping pressure on Japanese officials who have repeatedly signaled intervention to stem the yen's decline.
The 10-year Treasury yield surged to 4.58%, the highest in nearly 12 months, as bond traders reacted to stronger-than-expected U.S. manufacturing data. The New York Fed's Empire State manufacturing index jumped nine points to 19.6 in May, its highest in over four years, while the Federal Reserve reported a 0.6% increase in U.S. manufacturing output for April.
Rising yields and a stronger dollar weighed heavily on precious metals. Spot gold fell 2% to $4,557.61 per ounce, while COMEX June gold futures settled down 2.7% at $4,561.90. Silver was hit even harder, plunging 7.7% to $77.07 an ounce. Analysts at StoneX described silver as "overbought" and said a correction was overdue. Platinum slipped 3.6% and palladium lost 1.5%.
Oil prices surged on renewed geopolitical tensions. U.S. crude jumped 4.2% to $105.42 a barrel, while Brent crude added 3.35% to $109.26. Traders cited growing doubts about a swift return to normal traffic through the Strait of Hormuz and little progress in resolving the Iran conflict. Higher oil prices add to inflationary pressures, making it less likely that the Fed will cut rates anytime soon.
Wall Street stocks tumbled as the bond selloff spilled into equities. The Dow Jones Industrial Average lost 537.29 points, or 1.07%, to close at 49,526.17. The S&P 500 fell 1.24% to 7,408.50, and the Nasdaq Composite dropped 1.54% to 26,225.15, snapping a six-week winning streak. Only the energy sector managed a gain, rising 2.3%, while the other 10 S&P 500 sectors ended in the red.
Technology stocks, which had driven much of the market's recent gains, were hit particularly hard. The Philadelphia Semiconductor Index slumped 4%, with Nvidia falling 4.4%, AMD losing 5.7%, and Intel dropping 6.2%. In contrast, Microsoft rose 3.1% after Pershing Square disclosed a new stake in the company.
Market volatility spiked as traders increased bets on a Fed rate hike. The Cboe Volatility Index (VIX) surged 9.2% to 18.84 early Friday, closing at 18.43, up 6.78%. According to CME's FedWatch tool, the probability of at least a quarter-point rate hike in December jumped to 49.5%, up sharply from 14.3% the previous week.
New York Fed President John Williams said late Thursday that he sees no reason to shift rate policy at this point, but the market appears to be pricing in a more hawkish outlook. "The bond market's leading the charge," said Joseph Trevisani, senior analyst at FXStreet. Meanwhile, Erik Nelson at Wells Fargo suggested that dollar strength could "fizzle out" unless the Fed confirms rate-hike expectations.
Kenny Polcari, chief market strategist at Slatestone Wealth, warned that the AI trade had run "way ahead of itself" and that the market had been ignoring bond yields and economic data. Matthew Keator of the Keator Group added that the recent Trump-Xi meeting was more of a reset than a catalyst for immediate results.
