Dollar Pushes Higher as Bond Yields Rise

The dollar index (DXY00) on Friday rose by +0.15%.  The dollar moved higher on Friday due to weakness in the euro and yen, which both fell to 1.5-week lows against the dollar.  Also, higher T-note yields on Friday strengthened the dollar's interest rate differentials.  Strength in stocks on Friday curbed liquidity demand for the dollar and capped its gains. 

The US Dec S&P manufacturing PMI was kept unrevised at 51.8, right on expectations.

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) fell to a 1.5-week low on Friday and finished down by -0.22%.  The dollar's strength on Friday weighed on the euro.  Also, Friday's downward revision to the Eurozone Dec S&P manufacturing PMI and larger-than-expected increase in Nov M3 money supply were bearish for the euro.

The Eurozone Dec S&P manufacturing PMI was revised downward by -0.4 to 48.4 from the previously reported 49.2.

The Eurozone Nov M3 money supply rose +3.0% y/y, stronger than expectations of +2.7% y/y and the highest in four months.

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

USD/JPY (^USDJPY) on Friday rose by +0.08%.  The yen slid to a 1.5-week low against the dollar on Friday amid dollar strength.  Also, higher T-note yields on Friday undercut the yen.  Trading in the yen was below normal, as markets in Japan were closed on Friday for New Year's Day. 

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

February COMEX gold (GCG26) on Friday closed down -11.50 (-0.26%), and March COMEX silver (SIH26) closed up +0.412 (+0.58%). 

Gold and silver prices settled mixed on Friday.  The dollar's strength on Friday was bearish for metals prices.  Also, higher global bond yields on Friday were negative for precious metals.  In addition, precious metals have a negative carryover from Wednesday when the CME announced it was raising margins on precious metals for the second time in a week. Higher margins force traders to put up more cash to keep their positions open, prompting some to liquidate, which depresses prices.

Precious metals have ongoing support amid safe-haven demand amid uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East, and Venezuela.  Also, 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.  In addition, increased liquidity in the financial system is boosting demand for precious metals as a store of value, following the FOMC's December 10 announcement of a $40 billion-per-month liquidity injection into the US financial system.

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.