The dollar index (DXY00) rose +0.26% on Tuesday. The yen’s weakness is propping up the dollar, which fell to a 1-1/2-year low against the greenback on Tuesday. The dollar’s gains accelerated on Tuesday after U.S. new home sales in October fell less than expected and after St. Louis Federal Reserve President Alberto Musalem said the U.S. economy is quite robust and he expects above-potential growth.
The dollar’s gains were limited after news on Tuesday showed that core U.S. December consumer prices rose less than expected, a dovish factor for Federal Reserve policy. The dollar still has some negative carryovers from Monday, amid concerns about the Fed’s independence, after Fed Chair Powell said the Justice Department’s threat to bring criminal charges against the Federal Reserve for its June testimony on Fed headquarters renovations is a consequence of the Fed’s failure to heed President Trump’s calls to lower interest rates.
US December CPI was unchanged from November at +2.7% YoY, right in line with expectations. December core CPI was also unchanged from November at +2.6% YoY, a smaller increase than expectations of +2.7% YoY.
US new home sales in October fell -0.1% mom to 737,000, above expectations of 715,000.
St. Louis Federal Reserve President Alberto Musalem said the U.S. economy is quite robust and expects growth above potential, and that it is unnecessary and ill-advised for the Federal Reserve to adopt an accommodative stance.
Markets are pricing in the odds of a -25bp rate cut at the next FOMC meeting on January 27-28 at 3%.
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.
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 in mid-December. 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.
EUR/USD (^EURUSD) fell -0.16% on Tuesday. The euro fell on Tuesday due to the strength of the dollar. However, threats to the Federal Reserve’s independence are limiting the dollar’s gains and supporting the euro after Federal Reserve Chair Powell said on Sunday that the US Justice Department’s investigation into the Federal Reserve’s renovation of its building stems from its refusal to cut interest rates as much as President Trump wanted.
Swaps are pricing in a 1% chance that the ECB will raise rates +25 bps at the next monetary policy meeting on February 5.
USD/JPY (^USDJPY) rose +0.61% on Tuesday. The yen sank to a 1-1/2-year low against the dollar on Tuesday after Monday’s Yomiuri newspaper report said Japanese Prime Minister Takaichi could dissolve the lower house of parliament at the start of the next parliamentary session on Jan. 23 and call early elections on Feb. 8 or 15.
The yen is also being weakened by an escalation of tensions between China and Japan, 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 were to invade Taiwan. Export controls could worsen supply chains and negatively affect Japan’s economy.
Markets are pricing in a 0% chance of the BOJ raising rates at its next meeting on January 23.
February COMEX gold (GCG26) closed Tuesday down -15.60 (-0.34%) and March COMEX silver (SIH26) closed up +1.247 (+1.47%).
Gold and silver prices closed mixed on Tuesday, with March silver posting a new contract high and January silver nearer futures (SIF26) posting a new near futures record high of $88.61 a troy ounce.
February gold fell from a contractual high and turned lower after the dollar strengthened. Precious metal prices also retreated from their best levels due to hawkish comments from St. Louis Fed President Alberto Musalem, who said it is unnecessary and ill-advised for the Fed to adopt an accommodative stance.
Tuesday’s weaker-than-expected US December core CPI report is dovish for Fed policy and also bullish for precious metals prices. Concerns about the independence of the Federal Reserve are driving demand for safe-haven precious metals, following the US Department of Justice’s threat to indict the Federal Reserve. Federal Reserve Chair Powell said the potential impeachment comes amid “constant threats and pressure” from the Trump administration to influence interest rate decisions.
Precious metals are also supported after President Trump last Friday ordered Fannie Mae and Freddie Mac to buy $200 billion in mortgage bonds in an attempt to reduce borrowing costs and stimulate 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 continued support amid safe haven demand amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East and Venezuela. Additionally, precious metals are supported by concerns that the Fed will pursue looser monetary policy in 2026 as President Trump intends to appoint a more dovish Fed chair. Additionally, increased liquidity in the financial system is driving demand for precious metals as a store of value, following the FOMC’s Dec. 10 announcement of a $40 billion monthly liquidity injection into the U.S. financial system.
Strong demand for gold from the central bank supports prices, following last Wednesday’s 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 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.
Demand for precious metals funds remains strong, with long holdings in gold ETFs hitting a 3.25-year high on Monday. Additionally, long holdings in silver ETFs hit a 3.5-year high on December 23.
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
