The dollar index (DXY00) rallied to a 1-week high on Monday and finished up by +0.66%. The dollar rose on Monday amid carryover support from last Friday when 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 on Monday after the Jan ISM manufacturing index expanded at the strongest pace in more than 3.25 years. Also, hawkish comments on Monday from Atlanta Fed President Bostic were bullish for the dollar when he said he doesn’t see any Fed rate cuts this year.
The partial US government shutdown entered its third day on Monday. However, the shutdown is expected to be brief, as the House returns from a week-long break on Monday and may vote on the spending bill later Monday or Tuesday. Late last Thursday, President Trump said 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.
The US Jan ISM manufacturing index rose +4.7 to 52.6, stronger than expectations of 48.5 and the strongest pace of expansion in more than 3.25 years.
Atlanta Fed President Raphael Bostic said, “We have so much momentum in the US economy that the Fed needs to keep the policy rate in a mildly restrictive stance,” and therefore, he doesn’t project any rate cuts for 2026.
The dollar sank to a 4-year low last Tuesday when President Trump said he’s comfortable with the recent weakness in the dollar. Also, the dollar remains 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 12% 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) fell to a 1-week low on Monday and finished down by -0.58%. The euro was under pressure on Monday from a stronger dollar. The euro found some support on Monday after the Eurozone Jan S&P manufacturing PMI was revised upward and after German Dec retail sales rose as expected.
The Eurozone Jan S&P manufacturing PMI was revised upward by +0.1 to 49.5 from the previously reported 49.4.
German Dec retail sales rose +0.1% m/m, right on expectations, and Nov retail sales were revised upward by +0.1 to -0.5% m/m from the previously reported -0.6% m/m.
Swaps are pricing in a 2% chance of a +25 bp rate hike by the ECB at Thursday’s policy meeting.
USD/JPY (^USDJPY) on Monday rose by +0.56%. The yen fell to a 1-week low against the dollar on Monday due to comments from Japanese Prime Minister Takaichi, who said a weak currency can be a major opportunity for export industries, dampening speculation that her government is poised to intervene in currency markets to support the yen. Losses in the yen accelerated on Monday as T-note yields rose.
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.
Monday’s summary of opinions of the BOJ’s January 22 policy meeting were hawkish and supportive of the yen as one policymaker stated, “Given that addressing rising prices is an urgent priority in Japan, the BOJ should not take too much time examining the impact of raising the policy interest rate, and should proceed with the next step, a rate hike, without missing the appropriate timing.”
The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on March 19.
April COMEX gold (GCJ26) on Monday closed down -92.50 (-1.95%), and March COMEX silver (SIH26) closed down -1.522 (-1.94%).
Gold and silver prices retreated on Monday to 4-week lows and settled sharply lower. Monday’s rally in the dollar index to a 1-week high was bearish for metals prices. Also, easing geopolitical risks in the Middle East undercut safe-haven demand for precious metals after President Trump said the US is talking to Iran, and Iran’s foreign ministry said it hopes diplomatic efforts will avert a war. Losses in precious metals accelerated on Monday when Atlanta Fed President Raphael Bostic said he doesn’t see any Fed interest rate cuts this year.
Silver prices rose briefly on Monday before turning lower again after the Jan ISM manufacturing report showed manufacturing activity expanding at the strongest pace in more than 3.25 years, a bullish factor for industrial metals demand.
Precious metals also have a negative carryover from last Friday, when President Trump announced he had nominated Keven Warsh as the new Fed Chair, which fueled 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 are also under pressure on expectations that the current three-day partial US government shutdown will be short-lived, with the House back in session today and expected to vote on a spending plan to reopen the government late Monday or Tuesday. President Trump said last Thursday that he reached a tentative deal with Senate Democrats to avert a US government shutdown.
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 last Wednesday. Also, long holdings in silver ETFs rose to a 3.5-year high on December 23, though liquidation has since knocked them down to a 2.25-month low last Friday.
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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