Dollar Retreats and Precious Metals Surge to Record Highs

The dollar index (DXY00) on Friday tumbled to a 3.5-month low and finished down by -0.82%.  Friday's yen strength undercut the dollar after the yen whipsawed from a 1-week low up to a 4-week high on speculation that the Japanese government was intervening in the forex market to support the yen.  Also, Friday's stronger-than-expected economic news on UK manufacturing activity and retail sales lifted GBP/USD to a 4-month high, underscoring the dollar's weakness.  The dollar tumbled despite Friday's upward revision in the University of Michigan US Jan consumer sentiment index to a 5-month high.

The US Jan S&P manufacturing PMI rose +0.1 to 51.9, slightly weaker than expectations of 52.0.

The University of Michigan US Jan consumer sentiment index was revised upward by +2.4 to a 5-month high of 56.4, stronger than expectations of no change at 54.0.

The University of Michigan US Jan 1-year inflation expectations were revised lower to a 1-year low of 4.0% from the previously reported 4.2%.  Also, the Jan 5-10 year inflation expectations were revised lower to 3.3% from the previously reported 3.4%.

On Wednesday, President Trump said he would refrain from imposing tariffs on goods from European nations that oppose his effort to acquire Greenland.  NATO Secretary General Rutte said on Thursday that a breakthrough over Greenland was secured without discussing the territory's sovereignty with President Trump, instead focusing on the broader issue of security in the Arctic region. 

The markets are discounting the odds at 3% 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.  Last Friday, Mr. Trump said that he would announce his selection for the new Fed Chair within the next few weeks. 

EUR/USD (^EURUSD) on Friday rallied to a 4-month high and finished up by +0.60%.  Friday's sell-off in the dollar was bullish for the euro.  Also, Fridays' news that showed the Eurozone Jan S&P manufacturing PMI rose more than expected was a positive factor for the euro. 

The Eurozone Jan S&P manufacturing PMI rose +0.6 to 49.4, stronger than expectations of 49.2.

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 fell by -1.67%.  The yen whipsawed sharply from a 1-week low to a 4-week high against the dollar on Friday amid speculation that the Japanese government was intervening in the forex market to support the yen.  The yen also found support on Friday's news that showed Japanese manufacturing activity expanded by the strongest pace in nearly 3.5 years. In addition, the yen rallied after the BOJ raised its 2026 Japan GDP and CPI estimates.  Gains in the yen accelerated Friday after traders reported that the Federal Reserve Bank of New York had conducted an exchange rate check on the yen with major banks, a sign of impending currency intervention.

The yen initially moved lower on Friday after the BOJ kept its overnight call rate unchanged at 0.75% following today's policy meeting.  The yen was also temporarily pressured Friday after Japanese Prime Minister Takaichi dissolved the lower chamber of parliament to call a snap election for February 8 to pursue her expansionary fiscal policies, which will boost Japan's budget deficit and are bearish for the yen.

The Japan Jan S&P manufacturing PMI rose +1.5 to 51.5, the strongest pace of expansion in nearly 3.5 years.

The Japan Dec national CPI rose +2.1% y/y, weaker than expectations of +2.2% y/y.  The Dec national CPI ex-fresh food and energy rose +2.9% y/y, stronger than expectations of +2.8% y/y.

As expected, the BOJ voted 8-1 to keep its overnight call rate steady at 0.75% and said economic risks and price risks are generally balanced.

The BOJ raised its 2026 Japan GDP forecast to 1.0% versus 0.7% previously.  The BOJ also raised its 2026 core CPI forecast to 1.9% from 1.8% previously.

BOJ Governor Ueda said, "April is a month where there's relatively high numbers of price revisions, and while it's not the most important factor in deciding the next rate hike move, it's one of the factors."

The yen rallied sharply against the dollar today on speculation that Japan intervened in the currency market to support the yen after Finance Minister Katayama said, "We're always watching forex moves with a sense of urgency."

The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on March 19.

February COMEX gold (GCG26) on Friday closed up +66.30 (+1.35%), and March COMEX silver (SIH26) closed up +4.961 (+5.15%). 

Gold and silver prices rallied sharply on Friday, with Feb gold and Mar silver posting new contract highs. Also, nearest-futures Jan gold (GCF26) posted a new all-time high of $4,976.20 an ounce, and nearest-futures Jan silver (SIF26) posted a new record high of $101.08 a troy ounce.

Friday's sell-off in the dollar index to a 3.5-month low was bullish for metals prices.  Precious metals are also climbing as geopolitical risks and renewed threats to the Fed's independence are boosting demand for precious metals as a store of value.  In addition, Friday's action by Japanese Prime Minister Takaichi to dissolve the lower chamber of parliament and call a snap election for February 8 to pursue her expansionary fiscal policies is boosting demand for precious metals as a store of value. 

Friday's economic news showed signs of strength in global manufacturing activity that is bullish for industrial metals demand and silver prices.   The Eurozone Jan S&P manufacturing PMI rose +0.6 to 49.4, stronger than expectations of 49.2.  Also, the UK Jan S&P manufacturing PMI rose +1.0 to 51.6, stronger than expectations of no change at 50.6 and the fastest pace of expansion in 17 months. In addition, the Japan Jan S&P manufacturing PMI rose by +1.5 to 51.5, the strongest pace of expansion in nearly 3.5 years.

Precious metals have ongoing support amid safe-haven demand amid uncertainty over US tariffs and geopolitical risks in Iran, 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 74.15 million troy ounces in December, the fourteenth 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 Thursday.  Also, long holdings in silver ETFs rose to a 3.5-year high on December 23.