The dollar index (DXY00) today is down -0.09%, extending this week’s sell-off to about -0.7%. The dollar continues to trade on a weak note despite Tuesday's stronger-than-expected US GDP report of +4.3% and the reduced odds for Fed easing. The markets initially reduced the odds for a -25 bp rate cut at the next FOMC meeting to 13% from 20% after Tuesday’s GDP report, but the odds have since crept higher to the current level of 18%.
The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -50 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026.
The dollar is also under pressure as the Fed boosts liquidity in the financial system, having begun purchasing $40 billion a month in T-bills in mid-December. The dollar is also being undercut by concerns that President Trump intends to appoint a dovish Fed Chair, which would be bearish for the dollar. Mr. Trump recently said that he will announce his selection for the new Fed Chair in early 2026. Bloomberg reported that National Economic Council Director Kevin Hassett is the most likely choice as the next Fed Chair, seen by markets as the most dovish candidate.
The US on Thursday launched strikes on ISIS targets in Nigeria in a security and intelligence collaboration with the Nigerian government to combat rising terrorist attacks in the country. Nigeria is an OPEC member. Mr. Trump previously warned that the US would strike ISIS in Nigeria if the group did not stop killing Christians.
The US Coast Guard forced the sanctioned oil tanker, Bella 1, to turn away from Venezuela and move out into the Atlantic Ocean, according to a Bloomberg report. US forces have been shadowing the vessel for several days as part of President Trump’s blockade on sanctioned oil tankers connected with Venezuela. US forces wanted to board Bella 1 near Barbados on Sunday, but the vessel instead moved back out into the Atlantic Ocean.
There may be some progress on a Ukraine-Russia peace deal as Ukrainian President Zelensky said he expects to meet with President Trump on Sunday in Florida. Mr. Zelensky recently said that Ukraine might be willing to allow a peace deal involving a demilitarized zone in its eastern region in return for security guarantees from the US and Europe.
EUR/USD (^EURUSD) is up +0.08%. The euro saw support earlier this week from ECB member comments, indicating satisfaction with the current outlook for no interest rate cuts.
ECB Governing Council member Yannis Stournaras said Tuesday that the ECB is in a "good place" but needs to remain flexible to move policy in either direction. He said, "If we happen to be in a better or weaker position than expected, we will take appropriate action."
ECB Governing Council member Gediminas Simkus on Monday indicated satisfaction with the current level of interest rates, saying, "We have inflation – headline and core – both now and in the near future, and mid-term, close to the 2% level. The interest rate is seen by many as at a neutral level. Economic growth has improved though remains sluggish."
Meanwhile, ECB Governing Council member Peter Kazimir said on Monday that the ECB is comfortable with current rates but stands ready to act if conditions change. He said the current period of on-target inflation and steady economic expansion is "rather fragile" and that risks remain from tariffs and the Russia-Ukraine war.
Swaps are pricing in a 4% chance of a +25 bp rate hike by the ECB at the next policy meeting on February 5.
USD/JPY (^USDJPY) is down +0.28%. The yen was undercut by Thursday’s news that the Dec Tokyo CPI report eased to +2.0% y/y from +2.7% in Nov and was weaker than market expectations of +2.3%. Also, Japan’s Nov industrial production fell by -2.6% m/m and -2.1% y/y, weaker than expectations of -2.0% m/m and -0.8% y/y.
However, the yen rallied earlier this week after Finance Minister Satsuki Katayama this past weekend said Japan has a "free hand" to intervene against currency moves that are out of line with fundamentals, a reference to the yen's weakness last Friday after the BOJ's rate hike.
The yen has underlying support from last Friday's +25 bp rate hike by the Bank of Japan. The yen also has support from interest rate differentials, with the 10-year JGB yield posting a 26-year high of 2.073% on Monday, although that yield has since eased slightly to 2.042%.
The markets are discounting a 1% chance of a BOJ rate hike at the next meeting on January 23.
February COMEX gold (GCG26) today is up +53.6 (+1.19%), and March COMEX silver (SIH26) is up +3.560 (+4.97%). March copper is up +4.58%.
Gold and silver today both posted new all-time highs on the nearest-futures charts as the year-end buying spree continues. Precious metals prices are seeing support from geopolitical concerns as the US continues its blockade of sanctioned oil tankers connected with Venezuela and launched a military attack on ISIS targets in Nigeria on Thursday. Industrial metals prices have continued support from Tuesday’s US GDP report of +4.3%, which bolstered the US economic outlook.
Bullish underlying factors for precious metals include the FOMC's announcement on December 10 of a $40 billion per month liquidity injection into the US financial system. Precious metals have safe-haven support tied to uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East, and Venezuela. In addition, precious metals are supported by concerns that the Fed will pursue an easier monetary policy in 2026 as President Trump intends to appoint a dovish Fed Chair.
Strong central bank demand for gold is supportive of prices, following the recent news that bullion held in China's PBOC reserves rose by +30,000 ounces to 74.1 million troy ounces in November, the thirteenth consecutive month the PBOC has boosted its gold reserves. Also, the World Gold Council recently reported that global central banks purchased 220 MT of gold in Q3, up +28% from Q2.
Fund demand for precious metals remains strong, with long holdings in silver ETFs rising to a 3.5-year high on Tuesday before backing off slightly on Wednesday and Thursday. Holdings in gold ETFs have recovered in the past two months and are just mildly below the 3.25-year high posted in October
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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