The dollar index (DXY00) showed resilience on Friday, edging up by +0.04% despite early losses. The upward momentum came after President Trump hinted at his reluctance to nominate Kevin Hassett as the next Fed Chair. Hassett, considered a dovish candidate, was seen by markets as a potential nominee. In contrast, the possibility of Kevin Warsh, a known hawk, being nominated would be supportive of the dollar. The dollar also received a boost from the stronger-than-expected US Dec manufacturing production report.
Initially, the dollar faced downward pressure as the yen gained strength following hawkish comments from Japanese Finance Minister Satsuki Katayama. The yen’s rally was fueled by remarks suggesting the Japanese government’s readiness to take bold actions to prevent the yen from depreciating. Moreover, the dollar dipped further after the Jan NAHB housing market index unexpectedly declined.
US Dec manufacturing production exceeded expectations by rising +0.2% m/m, contrary to the anticipated decline of -0.1% m/m. Additionally, Nov manufacturing production was revised upward to +0.3% m/m from the previously reported flat growth. On the other hand, the US Jan NAHB housing market index disappointed with a -2 point drop to 37, falling short of the projected increase to 40.
Market sentiment reflects a mere 5% probability of a -25 bp rate cut at the upcoming FOMC meeting on January 27-28. The dollar’s underlying weakness persists as the FOMC is anticipated to slash interest rates by approximately -50 bp in 2026. In contrast, the BOJ is expected to raise rates by +25 bp in 2026, while the ECB is likely to maintain rates unchanged.
The dollar continues to face downward pressure due to the Fed’s liquidity injections into the financial system, with $40 billion in T-bills being purchased monthly since mid-December. Concerns also loom over President Trump’s potential appointment of a dovish Fed Chair, which could further weigh on the dollar. Trump’s announcement of the new Fed Chair selection in the coming weeks adds to the uncertainty surrounding the dollar’s future trajectory.
EUR/USD (^EURUSD) experienced a setback on Friday, erasing early gains and closing down by -0.08%. The euro’s decline was attributed to Friday’s dollar strength, which was bolstered by President Trump’s remarks and the ECB’s monetary policy stance.
In the precious metals market, February COMEX gold (GCG26) and March COMEX silver (SIH26) closed lower on Friday. Silver prices, in particular, plummeted due to long liquidation pressures following President Trump’s decision not to impose tariffs on critical mineral imports, including silver. The easing of geopolitical tensions in Iran also dampened safe-haven demand for precious metals.
Despite the challenges, precious metals retain support from ongoing geopolitical uncertainties, concerns over US tariffs, and the dovish monetary policy outlook. Central bank demand for gold remains robust, with the PBOC consistently boosting its gold reserves. Fund demand for precious metals is also strong, with long holdings in gold and silver ETFs reaching multi-year highs.
Overall, the market remains cautious, with various economic and geopolitical factors influencing the trajectory of the dollar and precious metals. The evolving landscape underscores the importance of staying informed and monitoring key developments to navigate the volatile market conditions effectively.
