The dollar index rose by 0.15% on Friday, driven primarily by weakness in the euro and the yen. Both currencies fell to their respective 1.5-week lows against the dollar. This movement was further supported by an increase in U.S. Treasury note yields, which enhanced the dollar’s attractiveness through improved interest rate differentials. However, gains were limited due to a stronger stock market that lessened liquidity demand for the dollar.
Economic indicators also played a crucial role in shaping the dollar’s movement. The U.S. December S&P manufacturing PMI was confirmed at 51.8, aligning with market expectations. Additionally, traders are currently assessing a 15% probability for a 25 basis point rate cut at the Federal Open Market Committee (FOMC) meeting scheduled for January 27-28, 2026. Despite these positive indicators, the dollar faces underlying pressures as the FOMC is predicted to implement a rate cut of approximately 50 basis points in 2026. In contrast, the Bank of Japan (BOJ) is anticipated to raise rates by 25 basis points in the same year, while the European Central Bank (ECB) is expected to maintain current rates.
In recent developments, the Federal Reserve has increased liquidity in the financial system by initiating monthly purchases of $40 billion in Treasury bills since mid-December. Concerns surrounding President Donald Trump’s potential appointment of a dovish Fed Chair, widely considered to be Kevin Hassett, have also contributed to the dollar’s pressure. Trump has indicated he will announce his choice for the new Fed Chair in early 2026.
The euro dropped by 0.22% on Friday, influenced by the dollar’s strength. This decline was exacerbated by a downward revision of the Eurozone December S&P manufacturing PMI, which adjusted from 49.2 to 48.4. Additionally, a larger-than-expected increase in the Eurozone’s November M3 money supply, which rose by 3.0% year-on-year, added to bearish sentiment, despite being the highest increase in four months.
The Japanese yen faced similar challenges, sliding to a 1.5-week low against the dollar, with USD/JPY rising by 0.08%. Trading activity for the yen was subdued as markets in Japan were closed for New Year’s Day. Currently, markets assign a 0% likelihood of a BOJ rate hike in their upcoming meeting on January 23.
In the commodities market, February COMEX gold closed down by $11.50 (-0.26%), while March COMEX silver saw a modest increase of $0.412 (+0.58%). The dollar’s strength and climbing global bond yields had a negative impact on precious metals prices. Additionally, the recent announcement from the CME regarding raised margins on precious metals contributed to price pressures, as traders were required to provide more cash to maintain their positions.
Nonetheless, precious metals continue to find support due to safe-haven demand amid ongoing uncertainties surrounding U.S. tariffs and geopolitical risks in regions such as Ukraine, the Middle East, and Venezuela. The anticipated easier monetary policy from the Fed, coupled with President Trump’s possible selection of a dovish Fed Chair, further bolsters demand for these assets.
Significant support for gold prices also stems from strong central bank purchases. Recently, the People’s Bank of China (PBOC) reported an increase of 30,000 ounces in its gold reserves, bringing the total to 74.1 million troy ounces. This marks the thirteenth consecutive month of increases. According to the World Gold Council, global central banks acquired 220 metric tons of gold in the third quarter, reflecting a 28% increase from the previous quarter. Fund demand remains robust, with long positions in gold ETFs reaching a 3.25-year high and silver ETFs achieving a 3.5-year high as of last Tuesday.
As global economic conditions continue to evolve, the dollar’s performance and the precious metals market will remain closely watched by investors and analysts alike.
