Dollar Finishes Higher and Precious Metals Plunge in Year-End Trading

The dollar index (DXY00) rallied to a 1-week high on Wednesday and finished up by +0.07%.  The dollar moved higher on Wednesday as T-note yields rose after weekly US unemployment claims unexpectedly fell to a 1-month low, a hawkish factor for Fed policy. Also, the weakness in stocks on Wednesday boosted some liquidity demand for the dollar. 

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 today.

US weekly initial unemployment claims unexpectedly fell -16,000 to a 1-month low of 199,000, showing a stronger labor market than expectations of an increase to 218,000.

The markets are discounting the odds at 15% 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) slid to a 1-week low on Wednesday and finished down by -0.03%.  The dollar's strength on Wednesday pressured the euro.  Also, the prospects that the Russian-Ukrainian war will drag on are bearish for the euro after there was no breakthrough in weekend talks to end the war. Trading in the euro was below normal, as German markets were closed on Wednesday for the New Year's holiday. 

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 Wednesday rose by +0.21%.  The yen fell to a 1-week low against the dollar on Wednesday amid dollar strength.  Also, higher T-note yields on Wednesday were bearish for the yen.  Trading in the yen was subdued, as markets in Japan were closed on Wednesday for a bank holiday. 

The markets are discounting a 1% chance of a BOJ rate hike at the next meeting on January 23.

February COMEX gold (GCG26) on Wednesday closed down -45.20 (-1.03%), and March COMEX silver (SIH26) closed down -7.316 (-9.39%). 

Gold and silver prices plummeted on Wednesday, with gold falling to a 2.5-week low and silver dropping to a 1-week low.  Precious metals prices came under pressure on Wednesday after the CME announced it was raising margins on precious metals for the second time this week.  The higher margins force traders to put up more cash to keep their positions open, which prompts some traders to exit their positions, further depressing prices.  Wednesday's rally in the dollar index to a 1-week high was also bearish for metals prices. In addition, higher T-note yields on Wednesday undercut precious metals prices. 

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 Tuesday.  Also, long holdings in silver ETFs rose to a 3.5-year high last Tuesday.