The dollar index (DXY00) on Wednesday fell by -0.03%. The dollar finished slightly lower on Wednesday and was under pressure most of the day after the yen rallied on jawboning from Japanese government officials. The dollar still has some negative carryover from Monday, amid concerns over Fed independence, after Fed Chair Powell said the Justice Department's threat of criminal charges against the Federal Reserve over his June testimony on Fed headquarters renovations is the consequence of the Fed not going along with President Trump's calls for lower interest rates. The dollar fell to its low today when Philadelphia Fed President Anna Paulson said she sees Fed rate cuts later this year.
However, the dollar recovered most of its losses on Wednesday afternoon after an upbeat Fed Beige Book noted that US economic activity picked up at a "slight to modest pace" in most parts of the country since mid-November. "This marks an improvement over the last three report cycles, where a majority of Fed districts reported little change."
The dollar also found support on Wednesday from stronger-than-expected US economic data on retail sales, producer prices, and existing home sales. In addition, hawkish comments from Minneapolis Fed President Neel Kashkari were supportive of the dollar when he said he doesn't see the "impetus" for the Fed to cut interest rates this month. Finally, weakness in stocks today has boosted some liquidity demand for the dollar.
US Nov PPI final demand rose +3.0% y/y, stronger than expectations of +2.7% y/y. Nov PPI ex-food and energy also rose +3.0% y/y, stronger than expectations of +2.7% y/y
US Nov retail sales rose +0.6% m/m, stronger than expectations of +0.5% m/m. Nov retail sales ex-autos rose +0.5% m/m, stronger than expectations of +0.4% m/m.
US Dec existing home sales rose +5.1% m/m to a 2.75-year high of 4.35 million, stronger than expectations of 4.22 million.
Minneapolis Fed President Neel Kashkari said the US economy is showing "resilience" and he doesn't see the "impetus" for the Fed to cut interest rates this month.
Philadelphia Fed President Anna Paulson said, "I see inflation moderating, the labor market stabilizing, and growth coming in around 2% this year. If all of 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 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. 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) on Wednesday finished unchanged. The euro gave up modest gains on Wednesday after the dollar recovered from early losses. Also, comments on Wednesday from ECB Vice President Luis de Guindos weighed on the euro when he said global uncertainty is weighing on the Eurozone economy.
ECB Vice President Luis de Guindos said Eurozone inflation "remains in a good place," though global uncertainty is weighing on the economy.
Swaps are pricing in a 1% chance of a +25 bp rate hike by the ECB at the next policy meeting on February 5.
USD/JPY (^USDJPY) on Wednesday fell by -0.38%. The yen rebounded from a 1.5-year low against the dollar on Wednesday, driven by hawkish comments from Japanese government officials. BOJ Governor Ueda said Japan's inflation and wages are likely to keep rising moderately, following the economy's resilience last year. Also, Japanese finance minister Katayama said, "We won't rule out any means and will respond appropriately to currency moves that are excessive, including those that are speculative." The yen added to its gains on Wednesday after T-note yields fell.
The yen remains under pressure, following Monday's Yomiuri report that 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 Wednesday closed up +36.60 (+0.80%), and March COMEX silver (SIH26) closed up +5.047 (+5.85%).
Gold and silver prices rallied sharply on Wednesday, with Fed gold and Mar silver posting new contract highs. Also, nearest-futures Jan gold (GCF26) rose to a new all-time high of $4,635.00 an ounce and Jan silver (SIF26) posted a new record nearest-futures high of $92.00 a troy ounce.
Precious metals surged on Wednesday as concerns about rising tensions in Iran and a possible US response to the killing of protesters by Iranian security forces boosted safe-haven demand for the metals. Reuters reported Wednesday that some US personnel have been advised to leave the US Al Udeid Air base in Qatar. The facility was targeted by Iran in retaliatory airstrikes last year after the US attacked Iran's nuclear facilities.
Silver prices also have carryover support from Wednesday's rally in copper, which reached an all-time high. Also, stronger-than-expected Chinese trade news on Wednesday was supportive of industrial metals demand. China Dec exports rose+6.6% y/y, stronger than expectations of +3.1% y/y, and Dec imports rose +5.7% y/y, stronger than expectations of +0.9% y/y.
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.
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 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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