The dollar index (DXY00) rose +0.19% on Wednesday. The dollar rose on Wednesday, following the end of the partial US government shutdown after President Trump signed a deal to fund the government on Tuesday night. Additionally, weakness in stocks on Wednesday fueled some liquidity demand for the dollar. Additionally, the yen’s weakness supports the dollar after the yen fell to a one-and-a-half-week low on Wednesday. The dollar added to its gains thanks to the stronger-than-expected January ISM Services Index.
However, the dollar’s gains were limited after the January ADP report showed employers added fewer jobs than expected last month, a dovish factor for Federal Reserve policy.
The dollar still retains support from last Friday, when President Trump nominated Keven Warsh as the next chairman of the Federal Reserve. Warsh is seen as more hawkish than other Fed chair candidates and often emphasized inflation risks during his tenure as Fed governor from 2006 to 2011.
US January ADP Employment Change increased by +22,000, less than expectations of +45,000.
The US January ISM services index was unchanged at 53.8, stronger than expectations for a drop to 53.5. The prices paid subindex of the January ISM services report rose +1.5 to 66.6, stronger than the 65.0 expected.
The dollar sank to a four-year low last Tuesday as President Trump said he is comfortable with the dollar’s recent weakness. In addition, the dollar remains under pressure as foreign investors withdraw capital from the United States amid a growing budget deficit, fiscal waste and increasing political polarization.
Markets are pricing in the odds of a -25bp rate cut at the next monetary policy meeting on March 17-18 at 10%.
The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by approximately -50bp in 2026, while the BOJ is expected to raise rates by another +25bp in 2026, and the ECB is expected to leave rates unchanged in 2026.
EUR/USD (^EURUSD) fell -0.12% on Wednesday. The euro fell on Wednesday after the core CPI and the eurozone January Composite PMI were revised downwards, which is dovish for ECB policy. Losses in the euro were limited due to short covering and position adjustment ahead of Thursday’s ECB meeting.
The eurozone’s January core CPI was revised down by -0.1% year-on-year to 2.2% year-on-year from the previously reported +2.3% year-on-year, the slowest pace of increase in four years.
The Eurozone S&P January Composite PMI was revised down by -0.2 to 51.3 from the previously reported 51.5.
The Eurozone December PPI fell -0.3% MoM and -2.1% YoY, right as expected, with the -2.1% YoY drop being the steepest YoY drop in 14 months.
Swaps price in a 1% chance that the ECB will raise rates by +25 bps at Thursday’s policy meeting.
USD/JPY (^USDJPY) rose +0.73% on Wednesday. The yen added to this week’s losses on Wednesday and hit a one-and-a-half-week low against the dollar. The yen is under pressure ahead of an expected victory for Prime Minister Takaichi’s Liberal Democratic Party in Sunday’s election, which could embolden Mrs. Takaichi’s budget stimulus plans and raise the risks of higher deficits. Higher Treasury yields on Wednesday also weighed on the yen. Wednesday’s upward revision of Japan’s S&P Services PMI for January supported the yen.
Japan’s S&P services PMI for January was revised up to 53.7 from the previously reported 53.4, the fastest pace of expansion in 11 months.
Markets are pricing in a 0% chance of the BOJ raising rates at its next meeting on March 19.
April COMEX gold (GCJ26) on Wednesday closed up +15.80 (+0.32%), and March COMEX silver (SIH26) closed up +1.095 (+1.31%).
Gold and silver prices rose on Wednesday, recovering some of the sharp declines seen over the past week. The risk of escalating tensions in the Middle East has boosted demand for safe-haven precious metals after the US Navy on Tuesday shot down an Iranian drone that had “aggressively approached” a US aircraft carrier in the Arabian Sea. Additionally, Axios reported Wednesday that the United States told Iran that it will not accept Iran’s demands to change the location and format of talks planned for Friday. This development raised expectations that the United States could continue military strikes against Iran, boosting demand for safe haven precious metals.
However, precious metals retreated from their best levels on Wednesday after dollar strength sparked a long sell-off, sending prices back from their highs.
Precious metals are also supported by safe haven demand amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East and Venezuela. Additionally, precious metals are rising as the dollar devaluation trade gains steam. Last Tuesday, President Trump said he is comfortable with the dollar’s recent weakness, which has triggered demand for metals as a store of value. Furthermore, US political uncertainty, large US deficits and uncertainty over government policies are prompting investors to reduce their holdings of dollar assets and shift into precious metals.
Finally, increased liquidity in the financial system is driving demand for precious metals as a store of value, following the FOMC’s December 10 announcement of a $40 billion monthly liquidity injection into the US financial system.
Precious metals sold off last Friday and Monday after President Trump announced that he had nominated Keven Warsh as the new chairman of the Federal Reserve, prompting the massive liquidation of long positions in precious metals. Warsh is one of the most hawkish candidates for Federal Reserve chair and is seen as less supportive of deep interest rate cuts.
Strong demand for gold from the central bank supports prices, following recent news that bullion held in China’s PBOC reserves increased by +30,000 ounces to 74.15 million troy ounces in December, the 14th consecutive month that the PBOC has increased its gold reserves. Additionally, the World Gold Council recently reported that global central banks purchased 220 MT of gold in the third quarter, up +28% from the second quarter.
Demand for precious metals funds remains strong, with long holdings in gold ETFs hitting a 3.5-year high last Wednesday. Additionally, long holdings in silver ETFs rose to a 3.5-year high on December 23, although the sell-off has since knocked them down to a 2.5-month low on Monday.
On the date of publication, Rich Asplund had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
