The dollar index (DXY00) dropped to a 2-week low on Tuesday and finished down by -0.79%.  The dollar retreated on Tuesday as President Trump's push to take over Greenland is reviving fears of trade confrontations between the US and its European allies, with little sign of de-escalation. 

Overnight, President Trump threatened steep tariffs on French champagne after French President Macron ruled out joining a US-led peace initiative.  There are also fears that rising tensions in Greenland could prompt European investors to dump their dollar assets.  President Trump over the weekend announced a 10% tariff on goods from eight European countries starting February 1, rising to 25% in June, unless there's a deal for the "purchase of Greenland."

The markets are discounting the odds at 5% for a -25 bp rate cut at the FOMC's next meeting on January 27-28.

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.  Last Friday, Mr. Trump said that he would announce his selection for the new Fed Chair within the next few weeks. 

EUR/USD (^EURUSD) rallied to a 3-week high on Tuesday and finished up by +0.63%.  The euro moved higher on Tuesday due to dollar weakness.  Also, Tuesday's news that the German ZEW survey expectations for economic growth rose more than expected to a 4.5-year high was bullish for the euro.

The German Jan ZEW survey expectations of economic growth rose by +13.8 to a 4.5-year high of 59.6, stronger than expectations of 50.0.

German Dec PPI fell -2.5% y/y, weaker than expectations of -2.4% y/y and the steepest pace of decline in 20 months.

Swaps are pricing in a 0% chance of a +25 bp rate hike by the ECB at the next policy meeting on February 5.

USD/JPY (^USDJPY) on Tuesday rose by +0.08%.  The yen posted modest losses on Tuesday amid concerns about Japan's widening deficits, after Bloomberg reported that Japanese Prime Minister Sanae Takaichi promised a temporary sales tax cut on food if she wins a fresh mandate for her new coalition.  Higher T-note yields on Tuesday were also negative for the yen. 

Losses in the yen were limited on Tuesday as rising trade tensions between the US and Europe over Greenland sparked some safe-haven demand for the yen.  Also, higher Japanese government bond yields have strengthened the yen's interest rate differentials, with the 10-year JGB yield rising to a nearly 27-year high of 2.359% on Tuesday. 

The yen has been under pressure since last Monday's Yomiuri report that said Japanese Prime Minister Takaichi may dissolve the lower house of parliament at the start of the next parliamentary session on Friday and call a snap election on February 8 or February 15. The yen is under pressure due to concerns that Takaichi's expansionary fiscal policy will persist and that the long-term inflation outlook will rise if the ruling LDP party secures a majority in a snap election. 

The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on January 23.

February COMEX gold (GCG26) on Tuesday closed up +170.40 (+3.71%), and March COMEX silver (SIH26) closed up +6.099 (+6.89%). 

Gold and silver prices rallied sharply on Tuesday, with Feb gold and Mar silver posting new contract highs. Also, nearest-futures gold (GCF26) posed a new record high of $4,764.00 an ounce, and nearest-futures silver (SIF26) posted a new all-time high of $94.99 a troy ounce. 

Tuesday's slide in the dollar index to a 2-week low was bullish for metals prices.  Also, the escalation of the Greenland crisis has prompted safe-haven buying of precious metals, as the standoff between the US and Europe over control of Greenland shows no signs of de-escalation.  In addition, concerns that Japan's expansionary fiscal policies will lead to soaring deficits are boosting demand for precious metals as a store of value.

Precious metals have ongoing support amid safe-haven demand amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela.  Also, 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.  In addition, increased liquidity in the financial system is boosting demand for precious metals as a store of value, following the FOMC's December 10 announcement of a $40 billion-per-month liquidity injection into the US financial system.

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 74.15 million troy ounces in December, the fourteenth 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 gold ETFs climbing to a 3.25-year high on Monday.  Also, long holdings in silver ETFs rose to a 3.5-year high on December 23.