The dollar index (DXY00) rose to a 1-week high on Tuesday and finished up by +0.18%. The dollar found support Tuesday from better-than-expected US economic news on home prices and the Dec MNI Chicago PMI. Also, higher T-note yields on Tuesday have strengthened the dollar’s interest rate differentials. The dollar extended its gains Tuesday afternoon from the slightly hawkish minutes of the December 9-10 FOMC meeting.
Questions about the Fed’s independence are limiting gains in the dollar after President Trump said Monday evening that he “still might” fire Fed Chair Powell. Also, strength in the Chinese yuan is undercutting the dollar after the yuan rallied to a 2.5-year high on Tuesday.
The US Oct S&P Case-Shiller composite-20 home price index rose +0.3% m/m and +1.3% y/y, stronger than expectations of +0.1% m/m and +1.1% y/y.
The US Dec MNI Chicago PMI rose +9.2 to 43.5, stronger than expectations of 40.0.
The minutes of the December 9-10 FOMC meeting were neutral to slightly hawkish and supportive of the dollar as some policymakers saw keeping interest rates on hold appropriate “for some time,” but some judged further rate cuts were likely appropriate if inflation continues to decline over time. Also, “several participants pointed to the risk of higher inflation becoming entrenched and suggested that lowering the policy rate further in the context of elevated inflation readings could be misinterpreted as implying diminished policymaker commitment to the 2% inflation objective.”
The markets are discounting the odds at 16% 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. 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.
EUR/USD (^EURUSD) fell to a 1-week low on Tuesday and finished down by -0.20%. The dollar’s strength on Tuesday weighed on the euro. Also, the prospects of the Russian-Ukrainian war dragging on are bearish for the euro after there was no breakthrough in weekend talks to end the war. Losses in the euro were limited after Tuesday’s news showed Spain’s Dec core CPI rose more than expected, a hawkish factor for ECB policy.
Spain Dec CPI (EU harmonized) rose +3.0% y/y, right on expectations. Dec core CPI rose +2.6% y/y, stronger than expectations of +2.5% y/y.
Swaps are pricing in a 1% 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 +0.25%. The yen was under pressure Tuesday from a stronger dollar. Also, higher T-note yields on Tuesday undercut the yen. Losses in the yen are contained on positive carryover from Monday, when the December 19 BOJ meeting showed that some policymakers signaled Japan’s real interest rate remains very low, suggesting further rate increases are likely.
The markets are discounting a 1% chance of a BOJ rate hike at the next meeting on January 23.
February COMEX gold (GCG26) on Tuesday closed up +42.70 (+0.98%), and March COMEX silver (SIH26) closed up +7.459 (+10.59%).
Gold and silver prices settled sharply higher on Tuesday, recovering some of Monday’s plunge. Concerns over Fed independence boosted safe-haven demand for precious metals after President Trump said he “still might” fire Fed Chair Powell. Precious metals prices are also seeing continued 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 last Thursday.
Tuesday’s rally in the dollar index to a 1-week high was bearish for metals prices. Also, Tuesday’s minutes of the December 9-10 FOMC meeting were slightly hawkish and negative for precious metals, after some policymakers said keeping interest rates on hold was appropriate “for some time.”
Bullish underlying factors for precious metals include the FOMC’s December 10 announcement 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 gold ETFs climbing to a 3.25-year high on Monday. Also, long holdings in silver ETFs rose to a 3.5-year high last Tuesday.
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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