Dollar Posts Modest Gains as EUR/USD Falls

The dollar index (DXY00) on Thursday rose by +0.05%.  The dollar recovered from early losses on Thursday and posted modest gains as EUR/USD retreated.  The dollar also found some support on Thursday after US weekly jobless claims fell as expected.  The dollar initially moved lower on Thursday amid weaker-than-expected US reports on the Nov CPI and the Dec Philadelphia Fed business outlook survey, which may prompt the Fed to keep easing monetary policy.  Also, strength in stocks on Thursday curbed liquidity demand for the dollar. 

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 weekly initial unemployment claims fell -13,000 to 224,000, close to expectations of 225,000.

US Nov CPI rose +2.7% y/y, weaker than expectations of +3.1% y/y.  Nov core CPI rose +2.6% y/y, weaker than expectations of +3.0% y/y and the smallest pace of increase in 4.5 years.

The US Dec Philadelphia Fed business outlook survey unexpectedly fell -8.5 to -10.2, weaker than expectations of an increase to 2.3.

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

EUR/USD (^EURUSD) on Thursday fell by -0.14%.  The euro gave up an early advance and turned lower on Thursday after Bloomberg reported that ECB officials expect the cycle of interest rate cuts to be most likely over, based on the latest outlook for growth and inflation.  Also, fiscal concerns in the Eurozone are weighing on the euro after Germany announced that it will boost federal debt sales by nearly 20% next year to a record 512 billion euros ($601 billion) to fund increased government spending. 

The euro initially moved higher on Thursday after the ECB kept interest rates unchanged as expected and raised its 2025 GDP forecast.  Also, hawkish comments from ECB President Lagarde supported the euro when she said the Eurozone economy has been "resilient."

The ECB, as expected, kept the deposit facility rate unchanged at 2.00%.  The ECB raised its 2025 Eurozone GDP forecast to 1.4% from a prior forecast of 1.2% and kept its 2025 inflation ex-food and energy forecast unchanged at 2.4%.

ECB President Lagarde said the Eurozone economy has been "resilient" and the inflation outlook has been more uncertain than usual.

Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the next policy meeting on February 5.

USD/JPY (^USDJPY) on Thursday fell by -0.08%.  The yen moved higher on Thursday amid weakness in the dollar. Also, lower T-note yields on Thursday were bullish for the yen.  In addition, the yen is supported by expectations that the BOJ will raise interest rates by 25 bp at Friday's policy meeting. 

Gains in the yen are contained amid concerns about Japanese fiscal policy, after Kyodo reported on Wednesday that the Japanese government is considering a record budget of over 120 trillion yen ($775 billion) for fiscal 2026. 

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

February COMEX gold (GCG26) on Thursday closed down -9.40 (-0.21%), and March COMEX silver (SIH26) closed down -1.682 (-2.51%).

Precious metals moved lower on Thursday as a rally in stocks reduced their safe-haven appeal.  Also, hawkish central bank comments on Thursday weighed on precious metals after ECB President Lagarde said the Eurozone economy has been "resilient," and BOE Governor Bailey said the bar for further BOE interest rate cuts has moved higher.  In addition, expectations that the BOJ will raise interest rates by 25 bp at Friday's policy meeting are bearish for precious metals.  Dollar strength on Thursday also sparked long liquidation and profit-taking pressures in silver, which has rallied sharply over the past three weeks to a record high on Wednesday. 

Precious metals found support on Thursday after the BOE cut interest rates by 25 bp, boosting demand for them as a store of value.  Also, Thursday's weaker-than-expected US economic reports on Nov CPI and the Dec Philadelphia Fed business outlook are dovish for Fed policy and bullish for precious metals.  In addition, precious metals have safe-haven demand tied to uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East, and Venezuela.  Finally, 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 on Tuesday.