The U.S. dollar advanced in the second quarter as a resilient economy and a hawkish-leaning Federal Reserve supported speculation for higher interest rates. As traders positioned for the shift, treasury yields were driven further above the yields in many other countries, providing global investors with a renewed incentive to shift into the dollar. The Canadian dollar languished as benign core inflation data was at odds with elevated inflation in the U.S. That saw expectations for Bank of Canada tightening fade, while calls for Fed rate hikes intensified. Lingering uncertainty surrounding the fate of the USMCA and the sharp pullback in oil prices added to the loonie’s woes. The euro and yen also retreated against a broadly stronger greenback, while the pound eked out a modest gain as investors braced for expansive fiscal policy under a new UK government.

Oil posted its biggest quarterly decline since the depths of the pandemic as flows through the Strait of Hormuz accelerated following progress on a peace deal between the U.S. and Iran. Expectations that flows will normalize relatively quickly eased concerns over supply disruptions and sent prices tumbling back towards pre-war levels. While the cessation of hostilities and reopening of the strait have been enthusiastically welcomed by financial markets, it merits repeating that the resumption of energy trade through the vital passageway is likely to be a gradual process, as evidenced by the current level of maritime traffic through the strait. Concerns also remain about the time to restore production capacity and to repair damaged infrastructure. Combined with the possibility for roadblocks to be encountered during upcoming negotiations and efforts to rebuild depleted inventories, risks related to oil prices remain skewed to the upside, in our view.

Gold posted its biggest quarterly decline in more than a decade. Mounting expectations for higher interest rates at the Federal Reserve sent both treasury yields and the U.S. dollar higher, dampening the appeal for the non-interest-bearing precious metal.

Copper posted an impressive return on the back of tight supply conditions. Traders piled into the red metal as major mines faltered, as a rush of material to the U.S. drained stockpiles, and as the artificial intelligence boom boosted demand.