Dollar Rises Alongside T-Note Yields

The dollar index (DXY00) on Tuesday rose by +0.30% but remained below Monday's 3.5-week high.  The dollar rallied on Tuesday as higher T-note yields strengthened the dollar's interest rate differentials.  Also, comments on Tuesday from Richmond Fed President Tom Barkin were supportive of the dollar when he said he expects tax cuts and deregulation to lift growth this year. The dollar still has some safe-haven support due to the escalation of geopolitical risks in Venezuela after the US captured Venezuelan President Maduro, and US President Trump said the US plans to temporarily "run" Venezuela.

Bearish factors for the dollar on Tuesday included (1) stock market strength that curbed liquidity demand for the dollar, (2) the downward revision to the Dec S&P services PMI, and (3) dovish comments from Fed Governor Stephen Miran, who said he expects more than 100 bp of Fed rate cuts this year. 

The US Dec S&P services PMI was revised downward by -0.4 to 52.5 from the previously reported 52.9.

Richmond Fed President Tom Barkin said he expects tax cuts and deregulation to lift growth this year, and that the outlook for monetary policy remains in a "delicate balance" given the conflicting pressures from rising unemployment and still-high inflation.

Fed Governor Stephen Miran said Fed policy is "clearly restrictive and holding the economy back and I think that well over 100 basis points of rate cuts are going to be justified this year."

The markets are discounting the odds at 18% 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) on Tuesday fell by -0.27% but remained above Monday's 3-week low.  Tuesday's dollar strength weighed on the euro.  Also, Tuesday's euro-negative economic news undercut the euro after the Eurozone Dec S&P composite PMI was revised lower and German CPI rose less than expected, both of which are dovish for ECB policy.

The Eurozone Dec S&P composite PMI was revised downward by -0.4 to 51.5 from the previously reported 51.9.

German Dec CPI (EU harmonized) rose +0.2% m/m and +2.0% y/y, weaker than expectations of +0.4% m/m and +2.2% 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 +0.15%.  The yen came under pressure on Tuesday amid a stronger dollar.  Also, higher T-note yields on Tuesday were bearish for the yen.  Losses in the yen were limited after the Japan 10-year JGB bond yield rose to a 27-year high of 2.139% on Tuesday, strengthening the yen's interest rate differentials. 

Japanese fiscal concerns continue to pressure the yen, as Prime Minister Takaichi's government is set to boost defense spending next fiscal year to a record level as part of a 122.3 trillion yen ($780 billion) budget approved by Japan's cabinet.

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

February COMEX gold (GCG26) on Tuesday closed up +44.60 (+1.00%), and March COMEX silver (SIH26) closed up +4.382 (+5.72%). 

Gold and silver prices extended Monday's sharp rally on Tuesday to 1-week highs.  Precious metals are climbing on safe haven demand from escalating geopolitical risks in Venezuela after the US captured Venezuelan President Maduro, and US President Trump said the US plans to temporarily "run" Venezuela.  Also, dovish comments on Tuesday from Fed Governor Stephen Miran boosted demand for precious metals as a store of value, as he said the Fed policy is clearly restrictive and that he expects more than 100 bp of Fed rate cuts this year.  Silver prices also received some carryover support from Tuesday's rally in copper, which reached a new all-time high. 

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 last Tuesday.  Also, long holdings in silver ETFs rose to a 3.5-year high on December 23.