The dollar index (DXY00) on Friday rose by +0.04%. The dollar recovered from early losses on Friday and moved higher after President Trump expressed reluctance to nominate Kevin Hassett as Fed Chair. Hassett was seen by markets as the most dovish candidate, so nominating someone like Kevin Warsh, a known hawk, would be dollar supportive. The dollar also found some support on the stronger-than-expected US Dec manufacturing production report.
The dollar on Friday initially moved lower as the yen rallied on hawkish comments from Japanese Finance Minister Satsuki Katayama, who said the Japanese government was ready to take "bold action" to stop the slide in the yen. The dollar fell to its low on Friday after the Jan NAHB housing market index unexpectedly declined.
US Dec manufacturing production unexpectedly rose +0.2% m/m, stronger than expectations of a decline of -0.1% m/m. Also, Nov manufacturing production was revised upward to +0.3% m/m from the previously reported unchanged m/m.
The US Jan NAHB housing market index unexpectedly fell -2 to 37, weaker than expectations of an increase to 40.
The markets are discounting the odds at 5% for a -25 bp rate cut at the FOMC's next meeting on January 27-28.
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. On Friday, Mr. Trump said that he will announce his selection for the new Fed Chair within the next few weeks.
EUR/USD (^EURUSD) on Friday gave up an early advance, fell to a 6-week low, and finished down by -0.08%. Friday's dollar strength weighed on the euro. The euro initially moved higher on Friday after ECB Chief Economist Philip Lane said he's comfortable with the ECB's monetary policy settings.
ECB Chief Economist Philip Lane said, "Our baseline scenario envisages inflation more or less at target for several years, growth close to potential, and low and declining unemployment. In these circumstances, there is no near-term interest rate debate."
Swaps are pricing in a 0% chance of a +25 bp rate hike by the ECB at the next policy meeting on February 5.
USD/JPY (^USDJPY) on Friday fell by -0.35%. The yen is moving higher against the dollar today on serious verbal threats against the weaker yen from Japanese Finance Minister Katayama, who said her recent agreement with the US Treasury Secretary includes possible currency intervention. Also, higher Japanese government bond yields have strengthened the yen's interest rate differentials, with the 10-year JGB yield rising to a nearly 27-year high today at 2.191%. The yen fell back from its best level on Friday after T-note yields rose.
Japanese Finance Minister Satsuki Katayama said she's concerned about the yen's recent weakness and reiterated that the government is ready to take "bold action" to support the yen.
The yen has been under pressure since Monday's Yomiuri report that said Japanese Prime Minister Takaichi may dissolve the lower house of parliament at the start of the next parliamentary session on January 23 and call a snap election on February 8 or February 15. The yen is under pressure due to concerns that Takaichi's expansionary fiscal policy will persist and that the long-term inflation outlook will rise if the ruling LDP party secures a majority in a snap election.
The yen is also being undercut by an escalation of China-Japan tensions, following China's announcement last week of export controls on items destined for Japan that could have military uses in retaliation for comments made by Japan's prime minister about a potential conflict if China invaded Taiwan. The export controls could worsen supply chains and negatively affect Japan's economy.
The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on January 23.
February COMEX gold (GCG26) on Friday closed down -28.30 (-0.61%), and March COMEX silver (SIH26) closed down -3.810 (-4.12%).
Gold and silver prices retreated on Friday, with silver prices sharply lower. Higher global bond yields on Friday weighed on precious metals. Also, an easing of geopolitical risks in Iran has curbed some safe-haven demand for precious metals after President Trump said he had been assured that Iran would stop killing protesters, in a signal that the US could hold off on a threatened military response to the widespread demonstrations.
Precious metals extended their losses on Friday after the dollar recovered from early losses and moved higher following President Trump's remarks that he was reluctant to nominate Keven Hassett as Fed Chair. Hassett was seen by markets as the most dovish candidate, so nominating someone like Kevin Warsh, a known hawk, would be negative for precious metals.
Silver prices plunged on Friday on long liquidation pressures after President Trump refrained from imposing tariffs on critical mineral imports, including silver, and said he would instead pursue bilateral negotiations. The fear of tariffs has kept silver supplies in US warehouses, contributed to a global short squeeze last year, and continues to support silver prices this year. About 434 million ounces of silver are held in warehouses linked to the Comex futures exchange, nearly 100 million ounces more than a year ago.
Concerns about the Fed's independence are boosting demand for precious metals as a store of value, following the US Justice Department's threat to indict the Federal Reserve. Fed Chair Powell said the potential indictment comes amid "threats and ongoing pressure" by the Trump administration to influence interest rate decisions. However, President Trump told Reuters on Thursday that he "has no plans" to fire Fed Chair Powell despite a Justice Department probe into the central bank's renovation.
Precious metals also have support after President Trump last Friday directed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds in an attempt to lower borrowing costs and spur housing demand. The bond-buying move is seen as quasi-quantitative easing, boosting demand for precious metals as a store of value.
Precious metals have ongoing support amid safe-haven demand amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela. Also, 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. In addition, 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 last Wednesday's 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 3.25-year high on Thursday. 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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