Dollar Moves Higher on Yen Weakness and Fed Comments

The dollar index (DXY00) climbed to a 1-week high on Friday and finished up by +0.19%.  The dollar rose on Friday amid yen weakness.  Also, upbeat comments on Friday from New York Fed President John Williams supported the dollar, as he said some of the data we're seeing is "pretty encouraging" and that he sees no sign of a sharp deterioration in the jobs data.  The dollar fell back from its best level after the University of Michigan's US Dec consumer sentiment index was unexpectedly revised lower.  Also, strength in stocks on Friday limited the dollar's upside. 

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 existing home sales rose +0.5% m/m to a 9-month high of 4.13 million, though below expectations of 4.15 million.

The University of Michigan US Dec consumer sentiment index was unexpectedly revised downward by -0.4 to 52.9, weaker than expectations of an upward revision to 53.5.

The University of Michigan US Dec 1-year inflation expectations were unexpectedly revised upward to 4.2% from the previously reported 4.1%.

New York Fed President John Williams said some of the data we're seeing is "pretty encouraging," and he sees no sign of a sharp deterioration in the jobs data.  He added that he sees US GDP growth of 1.5% to 1.75% this year, picking up next year, and that there's "no urgency to need to act further on monetary policy right now, because I think the cuts we've made have positioned us really well."

The markets are discounting a 22% chance that the FOMC will cut the fed funds target range by 25 bp at the January 27-28 FOMC meeting.

EUR/USD (^EURUSD) fell to a 1-week low on Friday and finished down -0.01%.  The euro moved lower on Friday after weaker-than-expected Eurozone economic news on German November producer prices and German January GfK consumer confidence were dovish for ECB policy and bearish for the euro.  Also, fiscal concerns in the Eurozone are weighing on the euro after Germany announced on Thursday 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 recovered most of its early losses Friday on hawkish comments from ECB Governing Council member Pierre Wunsch, who said the ECB can keep monetary policy steady if the economy evolves as expected.

German Nov PPI fell -2.3% y/y, weaker than expectations of -2.2% y/y and the steepest pace of decline in 20 months.

The German Jan GfK consumer confidence index unexpectedly fell -3.5 to a 1.75-year low of -26.9, weaker than expectations of an increase to -23.0.

ECB Governing Council member Pierre Wunsch said the ECB can leave interest rates untouched for some time if the predictions in its latest outlook on the economy and prices pan out.

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

USD/JPY (^USDJPY) on Friday rose by +1.29%.  The yen fell sharply to a 4-week low against the dollar on Friday, despite the BOJ raising interest rates by 25 bp after BOJ Governor Ueda indicated the BOJ will be cautious about further interest rate hikes. The yen tumbled Friday on in spite of a surge in Japanese government bond yields, as the 10-year JGB yield jumped to a 26-year high of 2.025%. 

Concerns about Japanese fiscal policy are also bearish for the yen after Kyodo reported on Wednesday that the Japanese government is considering a record budget of over 120 trillion yen ($775 billion) for fiscal 2026. 

Japan's Nov national CPI rose +2.9% y/y, right on expectations.  Nov national CPI ex-fresh food and energy rose +3.0% yy/, right on expectations.

As expected, the BOJ voted 9-0 to raise its overnight call rate by +25 bp to 0.75% and said it will keep raising rates if its economic and price outlook is realized.

BOJ Governor Ueda said he sees headline inflation below 2% in the first half of next year, and "the pace at which we adjust our rate will depend on the state of the economy and prices."

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

February COMEX gold (GCG26) on Friday closed up +22.80 (+0.52%), and March COMEX silver (SIH26) closed up +2.270 (+3.48%).

Precious metals settled higher on Friday, with silver up sharply as Mar silver posted a contract high and nearest-futures (Z25) silver posted an all-time high of $66.85 a troy ounce. Recent weaker-than-expected US economic news is dovish for Fed policy and has bolstered expectations for additional Fed rate cuts, a bullish factor for precious metals.  Thursday's US Nov core CPI report showed price growth slowed to the slowest pace in 4.5 years, and Friday's news showed the University of Michigan US Dec consumer sentiment index was unexpectedly revised lower. 

Precious metals also 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. 

Strength in the dollar is negative for metal prices as the dollar index rose to a 1-week high on Friday. Also, higher global bond yields on Friday were bearish for precious metals prices.  In addition, Friday's BOJ rate hike of 25 bp is curbing demand for precious metals as a store of value.  Finally, hawkish comments on Friday from NY Fed President Williams undercut precious metals, as he said there's no urgency for the Fed to cut interest rates. 

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.