The dollar index (DXY00) fell from a 3-week high on Monday and finished down by -0.16%. The dollar retreated on Monday after the US Dec ISM manufacturing index unexpectedly contracted by the most in fourteen months. Also, Monday’s rally in stocks curbed liquidity demand for the dollar.
The dollar on Monday initially moved higher as the escalation of geopolitical risks in Venezuela boosted safe-haven demand for the dollar after the US captured Venezuelan President Maduro, and US President Trump said the US plans to temporarily “run” Venezuela. Hawkish comments on Monday from Minneapolis Fed President Neel Kashkari were supportive of the dollar after he said, US interest rates may be “close to neutral” for the economy.
The US Dec ISM manufacturing index unexpectedly fell -0.3 to 47.9, weaker than expectations of an increase to 48.4 and the steepest pace of contraction in 14 months.
On Saturday, Philadelphia Fed President Anna Paulson said, “I see inflation moderating, the labor market stabilizing, and growth coming in around 2% this year. If all that happens, then some modest further adjustments to the funds rate would likely be appropriate later in the year.”
The markets are discounting the odds at 16% 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. 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.
EUR/USD (^EURUSD) recovered from a 3-week low on Monday and finished up by +0.06%. The euro rebounded after weak US manufacturing news knocked the dollar lower. Gains in the euro were limited as lower German bund yields on Monday undercut the euro’s interest-rate differentials, weighing on the currency.
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 Monday fell by -0.38%. The yen recovered from a 2.5-week low against the dollar on Monday and moved higher as short covering emerged on hawkish comments from BOJ Governor Ueda, who said the BOJ will keep raising interest rates if its economic outlook is realized. The yen also garnered support after the 10-year Japan JGB bond yield climbed to a 27-year high of 2.129% on Monday, which strengthened the yen’s interest rate differentials. In addition, lower T-note yields on Monday were bullish for the yen.
The yen initially moved lower on Monday amid Japanese fiscal concerns, as Prime Minister Takaichi’s government is set to boost defense spending next fiscal year to a record level as part of a 122.3 trillion-yen ($780 billion) budget approved by Japan’s cabinet.
The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on January 23.
February COMEX gold (GCG26) on Monday closed up +121.90 (+2.82%), and March COMEX silver (SIH26) closed up +5.642 (+7.94%).
Gold and silver prices rallied sharply on Monday amid escalating geopolitical risks in Venezuela, which have boosted safe-haven demand for precious metals. The US captured Venezuelan President Maduro over the weekend, and US President Trump said the US plans to temporarily “run” Venezuela. Also, dovish comments from Philadelphia Fed President Anna Paulson fueled demand for precious metals as a store of value when she said she expects the Fed to continue cutting interest rates later this year. Precious metals added to their gains on Monday when the dollar fell from a 3-week high and turned lower. Silver prices also received some carryover support from Monday’s rally in copper, which reached a new all-time high.
Precious metals have ongoing support amid safe-haven demand amid uncertainty over US tariffs and geopolitical risks in 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 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.
Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.25-year high last Tuesday. 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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