The dollar index (DXY00) on Friday rose by +0.79%. The dollar rallied on Friday after President Trump nominated Keven Warsh as the next Fed Chair. Mr. Warsh is seen as more hawkish than other Fed Chair candidates and often emphasized inflation risks during his tenure as a Fed Governor from 2006-2011. The dollar added to its gains Friday after US Dec producer prices rose more than expected and the Jan MNI Chicago PMI expanded at the strongest pace in more than two years, hawkish factors for Fed policy.
The dollar also rose after President Trump said late Thursday that he reached a tentative deal with Senate Democrats to avert a US government shutdown. The deal would fund the Homeland Security Department for two weeks to allow more time for talks on immigration enforcement and contains full-year funding for several other government agencies.
US Dec PPI final demand rose +0.5% m/m and +3.0% y/y, stronger than expectations of +0.2% m/m and +2.8% y/y. Dec PPI ex food and energy rose +0.7% m/m and +3.3% y/y, stronger than expectations of +0.2% m/m and +2.9% y/y.
The US Jan MNI Chicago PMI rose +11.3 to 54.0, stronger than expectations of 43.7 and the strongest pace of expansion in more than two years.
Fed comments on Friday were mixed for the dollar. On the positive side, St. Louis Fed President Alberto Musalem said, “With inflation above target and the risks to the outlook evenly balanced, I believe it would be unadvisable to lower the fed funds rate into accommodative territory at this time.” Conversely, Fed Governor Christopher Waller said, “Monetary policy is still restricting economic activity, and economic data make it clear to me further easing is needed.”
The dollar sank to a nearly 4-year low on Tuesday after President Trump said he’s comfortable with the recent weakness in the dollar. Also, the dollar continues to be under pressure as foreign investors pull capital from the US amid a growing budget deficit, fiscal profligacy, and widening political polarization.
The markets are discounting the odds at 17% for a -25 bp rate cut at the next policy meeting on March 17-18.
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.
EUR/USD (^EURUSD) on Friday fell by -0.92%. The euro tumbled on Friday due to the stronger dollar after President Trump nominated Keven Warsh as the next Fed Chair and after President Trump said late Thursday that he reached a tentative deal with Senate Democrats to avert a US government shutdown. Friday’s Eurozone economic news was mostly stronger-than-expected and supportive for the euro.
The Eurozone Dec unemployment rate unexpectedly fell -0.1 and matched a record low of 6.2%, showing a stronger labor market than expectations of no change at 6.3%.
ECB Dec 1-year inflation expectations were unchanged from Nov at 2.8%, stronger than expectations of a decline to 2.7%. The Dec 3-year inflation expectations unexpectedly rose +0.1 to a 2-year high of 2.6%, stronger than expectations of a decline to 2.4%.
Eurozone Q4 GDP rose +0.3% q/q and+1.3% y/y, slightly stronger than expectations of +0.2% q/q and +1.3% y/y.
German Jan CPI (EU harmonized) fell -0.1% m/m and rose +2.1% y/y, stronger than expectations of -0.2% m/m and +2.0% y/y.
Swaps are pricing in a 2% 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 +0.98%. The yen fell sharply on Friday amid a stronger dollar. Also, Friday’s news that showed Japan Dec retail sales fell by the most in 5.5 years and Japan Jan Tokyo CPI rose at the smallest pace of increase in 3.75 years are dovish for BOJ policy and negative for the yen. In addition, higher T-note yields on Friday were bearish for the yen.
The yen is also under pressure as early polls show Prime Minister Takaichi’s ruling Liberal Democratic Party is on track to win more seats in the February 8 snap election and may even secure a majority in the lower house, deepening fiscal concerns.
The yen fell sharply from Tuesday’s 3-month high against the dollar after US Treasury Secretary Bessent said on Wednesday that the US is “absolutely not” intervening in the forex market to support the yen. The yen had rallied earlier this week on speculation that US-Japan joint FX intervention may be forthcoming. US authorities reportedly called major banks last Friday to request dollar/yen quotes, a possible precursor to intervention. Also, Japanese Finance Minister Katayama said Tuesday that officials “will take action” in line with a US-Japanese FX agreement.
Japan Dec industrial production fell -0.1% m/m, stronger than expectations of -0.4% m/m.
Japan Dec retail sales fell -2.0% m/m, weaker than expectations of -0.5% m/m and the largest decline in 5.5 years.
Japan Jan Tokyo CPI rose +1.5% y/y, weaker than expectations of +1.7% y/y and the smallest pace of increase in 3.75 years. The Jan Tokyo CPI ex-fresh food and energy rose +2.4% y/y, weaker than expectations of +2.6% y/y and the smallest pace of increase in 10 months.
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 down -604.50 (-11.37%), and March COMEX silver (SIH26) closed down -35.898 (-31.37%).
Gold and silver prices plummeted on Friday, with Feb gold falling to a 1.5-week low and Mar silver sinking to a 3-week low. Friday’s announcement by President Trump that he has nominated Keven Warsh as the new Fed Chair sparked a rally in the dollar, fueling massive liquidation of long positions in precious metals. Mr. Warsh is one of the more hawkish candidates for Fed Chair and is seen as less supportive of deep interest rate cuts.
Precious metals also retreated on Friday after President Trump said late Thursday that he reached a tentative deal with Senate Democrats to avert a US government shutdown, reducing safe-haven demand for precious metals. In addition, Friday’s news showing US Dec producer prices rose more than expected is hawkish for Fed policy and bearish for precious metals.
On Thursday, nearest-futures gold (GCG6) posted an all-time high of $5,586.20 an ounce, and nearest-futures silver (SIG26) posted a new all-time high of $120.07 a troy ounce.
Precious metals are supported by safe-haven demand amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela. Also, precious metals are surging as the dollar debasement trade gathers steam. Late Tuesday, President Trump said that he’s comfortable with the recent weakness in the dollar, which sparked demand for the metals as a store of value. In addition, US political uncertainty, large US deficits, and uncertainty regarding government policies are prompting investors to cut holdings of dollar assets and shift into precious metals.
Finally, 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 3.5-year high on Wednesday. Also, long holdings in silver ETFs rose to a 3.5-year high on December 23.
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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