Dollar Weakens on Disappointing US Economic News

The dollar index (DXY00) on Tuesday fell to a 2.25-month low and finished down -0.21%.  The dollar was under pressure from Tuesday's Fed-friendly US economic reports on Nov payrolls, Oct retail sales, and Dec S&P manufacturing activity that bolster the outlook for the Fed to keep easing monetary policy.

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, effective last Friday.  Finally, 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.

US Nov nonfarm payrolls rose by +64,000, stronger than expectations of +50,000.  Oct nonfarm payrolls fell -105,000, weaker than expectations of -25,000.  The Nov unemployment rate rose +0.1 to a 4-year high of 4.6%. 

US Nov average hourly earnings rose +0.1% m/m and +3.5% y/y, weaker than expectations of +0.3% m/m and +3.6% y/y, with the +3.5% y/y gain the smallest year-on-year increase in 4.5 years.

US Oct retail sales were unchanged m/m, weaker than expectations of +0.1% m/m.  However, Oct retail sales ex-autos rose +0.4% m/m, stronger than expectations of +0.2% m/m.

The US Dec S&P manufacturing PMI fell -0.4 to a 5-month low of 51.8, weaker than expectations of 52.1.

The markets are discounting a 24% chance that the FOMC will cut the fed funds target range by 25 bp at the January 27-28 FOMC meeting.

EUR/USD (^EURUSD) climbed to a 2.5-month high on Tuesday and finished up +0.02%.  Dollar weakness on Tuesday supported modest gains in the euro.  Also, Tuesday's report on German Dec business sentiment unexpectedly rose to a 5-month high, a supportive factor for the euro.  Gains in the euro are limited after the Eurozone Dec S&P manufacturing PMI unexpectedly contracted at the steepest pace in 8 months. 

The euro has support due to divergent central bank policies, with the Fed expected to continue cutting interest rates in 2026 while the ECB is seen to have finished its rate-cutting campaign.

The Eurozone Dec S&P manufacturing PMI unexpectedly fell -0.4 to 49.2, weaker than expectations of an increase to 49.9 and the steepest pace of contraction in 8 months.

The German Dec ZEW survey expectations of economic growth unexpectedly rose by +7.3 to a 5-month high of 45.8, stronger than expectations of a decline to 38.4.

Swaps are pricing in a 0% chance of a -25 bp rate cut by the ECB at Thursday's policy meeting.

USD/JPY (^USDJPY) on Tuesday fell by -0.37%.  The yen rose to a 1-week high against the dollar on Tuesday after weak US economic news on Nov payrolls, Oct retail sales, and Dec S&P manufacturing activity knocked the dollar lower.  The yen also found support on Tuesday's financial news, which showed that Japan's Dec S&P manufacturing PMI rose to a 6-month high. In addition, the yen is climbing on expectations that the BOJ will raise interest rates by 25 bp at Friday's policy meeting. 

The Japan Dec S&P manufacturing PMI rose +1.0 to a 6-month high of 49.7.

The markets are discounting a 96% chance of a BOJ rate hike at the next policy meeting on Friday.

February COMEX gold (GCG26) on Tuesday closed down -2.90 (-0.07%), and March COMEX silver (SIH26) closed down -0.266 (-0.42%).

Gold and silver prices settled lower on Tuesday.  Gold prices gave up an early advance on Tuesday and turned lower as falling inflation expectations reduced demand for gold as an inflation hedge, following the 10-year breakeven inflation rate's drop to a 2-week low.  Also, silver prices were under pressure on Tuesday after US December manufacturing activity slowed to a 5-month low and Eurozone December manufacturing activity contracted by the most in 8 months, signaling weak demand for industrial metals.  In addition, expectations that the BOJ will raise interest rates at this Friday's policy meeting are bearish for precious metals. 

Tuesday's fall in the dollar index today to a 2.25-month low is supportive for metals prices.  Also, Tuesday's US economic reports, which showed the Nov unemployment rate rose to a 4-year high and Oct retail sales unexpectedly stagnated, are dovish for Fed policy and support demand for precious metals as a store of value. 

Precious metals have carryover support from last Wednesday, when the Fed said it would boost liquidity in the financial system by purchasing $40 billion of T-bills per month, which fuels demand for precious metals as a store of value.  Also, precious metals have safe-haven demand 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. 

Silver has support due to concerns about tight Chinese silver inventories.  Silver inventories in warehouses linked to the Shanghai Futures Exchange on November 21 fell to 519,000 kilograms, the lowest level in 10 years.

Since posting record highs in mid-October, long liquidation pressures have weighed on precious metals prices, as ETF holdings have recently fallen after reaching 3-year highs on October 21.  However, fund demand for silver has rebounded, as long holding in silver ETFs rose to a nearly 3.5-year high Monday.