The dollar index (DXY00) rose +0.24% on Wednesday. The dollar rose on Wednesday due to GBP/USD weakness after November consumer prices in the UK rose less than expected. Additionally, the yen’s weakness on Wednesday was positive for the dollar as Japanese fiscal concerns weigh on the yen. Additionally, Wednesday’s stock market crash boosted liquidity demand for the dollar. The dollar retreated from its best level following dovish comments from Federal Reserve Governor Waller, who said the Fed can continue to cut rates as interest rates are still 50 to 100 basis points above the neutral level.
The dollar is also under pressure as the Federal Reserve increases liquidity in the financial system, having started buying $40 billion a month in Treasury bills, starting last Friday. Finally, the dollar is also being weakened by concerns that President Trump intends to appoint a dovish Federal Reserve chair, which would be bearish for the dollar. Trump recently said he will announce his choice for the new Federal Reserve chair in early 2026. Bloomberg reported that National Economic Council Director Kevin Hassett is the most likely choice as the next Federal Reserve chair, seen by markets as the most moderate candidate.
Federal Reserve Governor Christopher Waller said the U.S. labor market is “pretty weak,” with job growth near zero, and inflation is “pretty well anchored” around 2%. He added that interest rates are still 50 to 100 basis points above the neutral level and that the Federal Reserve can reduce them steadily and without rush.
Atlanta Federal Reserve President Raphael Bostic said U.S. GDP growth is strong and he expects it to continue into 2026. He added that in the near future, inflation is more concerning than the labor market.
Markets are pricing in a 24% chance that the FOMC will reduce the fed funds target range by 25 bps at the January 27-28 FOMC meeting.
EUR/USD (^EURUSD) fell -0.04% on Wednesday. The euro came under pressure on Wednesday from a stronger dollar. The euro also fell after eurozone economic news on Wednesday showed the November CPI was revised lower and third-quarter labor costs posted their smallest rise in three years, both factors dovish for ECB policy. Additionally, Wednesday’s unexpected drop in the German December IFO business conditions survey to a seven-month low was bearish for the euro.
The euro is supported by divergent central bank policies, and the Federal Reserve is expected to continue cutting interest rates in 2026, while the ECB is considered to have ended its rate-cutting campaign.
Eurozone November CPI was revised down to +2.1% yoy from +2.2% yoy previously reported.
Eurozone third-quarter labor costs decreased to +3.3% year-on-year from +3.9% year-on-year in the second quarter, the slowest rate of increase in three years.
The German IFO Business Conditions Survey for December unexpectedly fell -0.4 to a 7-month low of 87.6 versus expectations for a rise to 88.2.
Swaps are pricing in a 0% chance that the ECB will cut rates by -25 bps at Thursday’s policy meeting.
USD/JPY (^USDJPY) on Wednesday rose +0.63%. The yen retreated on Wednesday due to the strength of the dollar. Additionally, concerns over Japanese fiscal policy are bearish for the yen after Kyodo reported that the Japanese government is considering a record budget of more than 120 trillion yen ($775 billion) for fiscal year 2026.
On the positive side for the yen was Wednesday’s economic news that showed November Japanese exports rose more than expected and October core machinery orders unexpectedly posted their biggest increase in 7 months. Additionally, higher Japanese government bond yields strengthened yen interest rate differentials after the 10-year JGB yield rose to an 18-year high of 1.983% on Wednesday. Additionally, the yen is supported by expectations that the BOJ will raise interest rates by 25 basis points at Friday’s monetary policy meeting.
Japan’s October main machine orders unexpectedly rose +7.0% MoM, stronger than expectations for a -1.8% MoM decline and the biggest increase in 7 months.
Japanese trade news was mixed, as Japan’s exports in November rose 6.1% year-on-year, more than the expected 5.0% year-on-year and the biggest increase in nine months. However, November imports rose 1.3% year-on-year, below expectations of 3.0% year-on-year.
Markets are pricing in a 98% chance that the BOJ will raise rates at the next policy meeting on Friday.
February COMEX gold (GCG26) on Wednesday closed up +41.60 (+0.96%), and March COMEX silver (SIH26) closed up +3.578 (+5.65%).
Precious metals rallied sharply on Wednesday, with March silver hitting a contract high and silver nearer futures (Z25) hitting an all-time high of $66.48 a troy ounce. Rising tensions in Venezuela are driving demand for safe-haven precious metals after President Trump ordered a “total and complete blockade of all sanctioned oil tankers” entering and leaving Venezuela. Additionally, Wednesday’s dovish comments from Fed Governor Christopher Waller boosted demand for precious metals as a store of value as he said the Fed may continue to cut rates given that US interest rates are still 50-100 bps above neutral. Additionally, fiscal concerns in Japan support demand for precious metals as a store of value, following Kyodo’s report that the Japanese government is considering a record budget of more than 120 trillion yen ($775 billion) for fiscal 2026.
Precious metals have carryover support from last Wednesday, when the Federal Reserve said it would increase liquidity in the financial system by purchasing $40 billion in Treasury bills per month, fueling demand for precious metals as a store of value. Additionally, precious metals have safe haven demand tied to uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East and Venezuela. Additionally, precious metals are supported by concerns that the Federal Reserve will pursue looser monetary policy in 2026 as President Trump intends to appoint a prudent Federal Reserve chair.
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 74.1 million troy ounces in November, the 13th consecutive month in which 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, +28% more than in the second quarter.
Silver is supported by concerns over low Chinese silver inventories. Silver inventories in warehouses linked to the Shanghai Futures Exchange fell on November 21 to 519,000 kilograms, the lowest level in 10 years.
Since hitting all-time highs in mid-October, long-term sell-off pressures have weighed on precious metals prices, as ETF holdings have recently fallen after hitting 3-year highs on October 21. However, demand for silver funds has recovered, as long-term holdings in silver ETFs rose to a nearly 3.5-year high on Tuesday.
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
