The dollar index (DXY00) on Monday fell by -0.32%, retreating from last Friday’s 1-week high. 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.
In a bearish factor for the dollar, Fed Governor Stephen Miran said on Monday, “If we don’t adjust policy down, then I think we do run risks” of a recession. However, he also said he doesn’t foresee a recession.
The markets are discounting a 20% chance that the FOMC will cut the fed funds target range by -25 bp at the January 27-28 FOMC meeting.
EUR/USD (^EURUSD) rose by +0.41% on weakness in the dollar. The euro found support from comments by ECB officials on Monday, who said they are satisfied with the current outlook for no interest rate cuts.
ECB Governing Council member Gediminas Simkus on Monday indicated satisfaction with the current level of interest rates, saying, “We have inflation – headline and core – both now and in the near future, and mid-term, close to the 2% level. The interest rate is seen by many as at a neutral level. Economic growth has improved though remains sluggish.”
Meanwhile, ECB Governing Council member Peter Kazimir said on Monday that the ECB is comfortable with current rates but stands ready to act if conditions change. He said the current period of on-target inflation and steady economic expansion is “rather fragile” and that risks remain from tariffs and the Russia-Ukraine war.
Swaps are pricing in a 0% chance of a -25 bp rate cut by the ECB at the next policy meeting on February 5.
USD/JPY (^USDJPY) on Monday fell by -0.47%. The yen rallied after Finance Minister Satsuki Katayama said Japan has a “free hand” to intervene against currency moves that are out of line with fundamentals, a reference to the yen’s weakness last Friday after the BOJ’s rate hike.
The yen has underlying support from last Friday’s +25 bp rate hike by the Bank of Japan. The yen also has support from interest rate differentials, with the 10-year JGB yield on Monday rising +4.9 bp to 2.021% and posting a new 26-year high.
The markets are discounting a 0% chance of a BOJ rate hike at the January 23 policy meeting.
February COMEX gold (GCG26) on Monday closed up +82.10 (+1.87%), and March COMEX silver (SIH26) closed up +1.076 (+1.59%). Feb gold and March silver on Monday both posted new contract highs. Gold and silver futures both posted new all-time highs on the nearest-futures charts.
Bullish factors for precious metals included the FOMC’s recent announcement of a $40 billion per month liquidity injection into the US financial system. Precious metals prices are also being boosted by geopolitical risks, as the US is looking to seize two more Venezuelan-linked oil tankers. Also, Ukraine late last week hit an oil tanker from Russia’s shadow fleet in the Mediterranean Sea for the first time.
Precious metals have safe-haven support tied to uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East, and Venezuela. In addition, 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.
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.
Silver has support due to concerns about tight Chinese silver inventories. Silver inventories in warehouses linked to the Shanghai Futures Exchange on November 21 fell to 519,000 kilograms, the lowest level in 10 years.
Fund demand for precious metals remains strong, with long holdings in silver ETFs rising to a 3.5-year high last Tuesday.
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. This article was originally published on Barchart.com
