Dollar Falls as Stocks Rally

The dollar index (DXY00) on Wednesday fell by -0.16%.  The dollar moved lower on Wednesday amid a stronger yuan, which rallied to a 2.75-year high.   Also, comments on Tuesday evening by President Trump at the State of the Union address fueled trade uncertainty and weighed on the dollar, as he reiterated his resolve to impose trade tariffs.  In addition, strength in stocks on Wednesday reduced liquidity demand for the dollar.

Losses in the dollar were limited amid weakness in the yen, which dropped to a 2-week low against the dollar on Wednesday.  Also, higher T-note yields on Wednesday strengthened the dollar’s interest rate differentials.

Comments on Wednesday from St. Louis Fed President Alberto Musalem were neutral for the dollar, saying the fed funds rate is near neutral and well positioned to balance risks to employment and inflation.

Swaps markets are discounting the odds at 2% 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 Wednesday rose by +0.29%.  The euro moved higher on Wednesday after Q4 German GDP was left unrevised, but Q4 private consumption, government spending, and capital investment were revised higher, supportive factors for the euro.  Gains in the euro were limited after the German Mar GfK consumer confidence index unexpectedly declined.

German Q4 GDP was unrevised at +0.3% q/q and +0.6% y/y.  Q4 private consumption was revised upward to +0.5% from the previously reported +0.3%. Q4 government spending was revised upward to +1.1% from the previously reported +0.7%.  Q4 capital investment was revised upward to +1.0% from the previously reported +0.7%. 

The German Mar GfK consumer confidence index unexpectedly fell -0.5 to -24.7, weaker than expectations of an increase to -23.0.

Swaps are discounting a 1% chance of a -25 bp rate cut by the ECB at its next policy meeting on March 19.

USD/JPY (^USDJPY) on Wednesday rose by +0.33%.  The yen dropped to a 2-week low against the dollar on Wednesday after Prime Minister Takaichi’s government nominated two new BOJ board members, Ayano Sata and Toichiro Asada, who are known for the accommodative monetary policy stance.  Wednesday’s higher T-note yields were also bearish for the yen.

The Japan Jan service PPI was unchanged from Dec at +2.6% y/y, right on expectations and the slowest pace of increase in 1.75 years.

The markets are discounting a +4% chance of a BOJ rate hike at the next meeting on March 19.

April COMEX gold (GCJ26) on Wednesday closed up by +49.90 (+0.96%), and March COMEX silver (SIH26) closed up +3.482 (+3.98%). 

Gold and silver prices settled sharply higher on Wednesday, with silver posting a 3-week high.  Precious metals found support on Wednesday on US trade uncertainty after President Trump at the State of the Union address Tuesday evening reiterated his resolve to impose trade tariffs.  Also, heightened US-Iran tensions are fueling safe haven demand for precious metals after President Trump said Iranian officials are “again pursuing their sinister nuclear ambitions,” boosting speculation that the US may be preparing a military strike on Iran in the coming days.  In addition, silver prices are moving higher on expectations of stronger Chinese industrial metals demand after the country reopened on Monday from the week-long Lunar New Year holidays. 

Precious metals also have support amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela.  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. 

Strong central bank demand for gold is also supportive of prices, following the recent news that bullion held in China’s PBOC reserves rose by +40,000 ounces to 74.19 million troy ounces in January, the fifteenth consecutive month the PBOC has boosted its gold reserves. 

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.

Gold and silver plunged from record highs on January 30 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.  Also, recent volatility in precious metals prices has prompted trading exchanges worldwide to raise margin requirements for gold and silver, leading to the liquidation of long positions. 

Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.5-year high on Tuesday.  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 3.25-month low on Monday.