The dollar index (DXY00) Monday fell by -0.58% and posted a 1-1/4 month low. Escalation of US-China trade tensions has led to a selloff of the US dollar after China accused the US of violating their recent trade deal by unilaterally introducing new discriminatory restrictions.  Also, dovish Fed comments on Monday weighed on the dollar when Fed Governor Waller said he sees a path to Fed interest rate cuts later this year, and Chicago Fed President Goolsbee said if uncertainty around trade policy is resolved, the Fed can cut interest rates.  Losses in the dollar accelerated after Monday's US economic news showed the May ISM manufacturing index and Apr construction spending unexpectedly declined.

Escalating trade tensions between the US and China have eroded confidence in the dollar.  China's Ministry of Commerce on Monday accused the US of unilaterally introducing new discriminatory restrictions, including new guidelines on AI chip export controls, curbs on chip design software sales to China, and the revocation of Chinese student visas, and vowed to take measures to defend its interests.  The latest flare-up threatens to worsen trade relations even after President Trump expressed hope he will speak with Chinese President Xi Jinping this week to accelerate a trade truce.

The US May ISM manufacturing index unexpectedly fell -0.2 to 48.5, weaker than expectations of an increase to 49.5 and the steepest pace of expansion in 6 months.

US Apr construction spending unexpectedly fell -0.4% m/m, weaker than expectations of a +0.2% m/m increase.

Fed Governor Waller said, "Assuming that the effective tariff rate settles close to my lower tariff scenario, that underlying inflation continues to make progress to our 2% goal, and that the labor market remains solid, I would be supporting good news rate cuts later this year."

Dallas Fed President Logan said the Fed can afford to be patient before acting on interest rates as "both sides of our dual mandate appear fairly balanced."

Chicago Fed President Goolsbee said the Fed can proceed with interest rate cuts if uncertainty around trade policy is resolved.

The markets are discounting the chances at 5% for a -25 bp rate cut after the June 17-18 FOMC meeting.

EUR/USD (^EURUSD) Monday rose by +0.78% and posted a 1-1/4 month high.  The escalation of US-China trade tensions is pressuring the dollar to the benefit of the euro.  Further upside in the euro may be limited after the German May S&P manufacturing PMI was revised downward.  Also, expectations that the ECB will cut interest rates by -25 bp at Thursday's policy meeting are negative for the euro. 

The German May S&P manufacturing PMI was revised downward by -0.5 to 48.3 from the previously reported 48.8.

Swaps are discounting the chances at 98% for a -25 bp rate cut by the ECB at Thursday's policy meeting.

USD/JPY (^USDJPY) Monday fell by -0.83%.  The yen rallied against the dollar Monday as the escalation of US-China trade tensions boosted safe-haven demand for the yen after China accused the US of violating their recent trade deal by unilaterally introducing new discriminatory restrictions.  The yen also garnered support from Monday's Japanese economic news that showed the May Jibun Bank manufacturing PMI was revised upward, and Q1 capital spending ex-software rose more than expected. 

The Japan May Jibun Bank manufacturing PMI was revised upward by +0.4 to 49.4 from the previously reported 49.0.

Japan's Q1 capital spending ex-software rose +6.9% y/y, stronger than expectations of +5.3% y/y.

August gold (GCQ25) Monday closed up +81.80 (+2.47%), and July silver (SIN25) closed up +1.665 (+5.04%).  Precious metals rallied sharply on Monday, with gold posting a 3-week high and silver posting a 2-month high.  Monday's fall in the dollar index to a 1-1/4 month low is bullish for metals.  Also, the escalation of US-China trade tensions has boosted safe-haven demand for precious metals after China accused the US of unilaterally introducing new discriminatory trade restrictions.  In addition, dovish Fed comments supported demand for precious metals as a store of value when Fed Governor Waller said he sees a path for Fed rate cuts later this year, and Chicago Fed President Goolsbee said the Fed can proceed with interest rate cuts if uncertainty around trade policy is resolved.  Finally, precious metals prices have continued safe-haven support from uncertainty about global trade relations and geopolitical tensions in Ukraine and the Middle East.

Higher global bond yields on Monday are negative for precious metals.  Also, concern that the escalation of US-China trade tensions will lead to diminished economic activity that curbs demand for industrial metals is a negative factor for silver prices.