The dollar index (DXY00) on Tuesday rose by +0.26%. The yen’s weakness is underpinning the dollar, as it tumbled to a 1.5-year low against the dollar on Tuesday. Gains in the dollar accelerated Tuesday after US Oct new home sales fell less than expected and after St. Louis Fed President Alberto Musalem said the US economy is pretty robust and that he expects above-potential growth.
Gains in the dollar were limited after Tuesday’s news showed that US December core consumer prices rose less than expected, a dovish factor for Fed policy. 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.
US Dec CPI was unchanged from Nov at +2.7% y/y, right on expectations. Dec core CPI was also unchanged from Nov at +2.6% y/y, a smaller increase than expectations of +2.7% y/y.
US Oct new home sales fell -0.1% m/m to 737,000, stronger than expectations of 715,000.
St. Louis Fed President Alberto Musalem said the US economy is pretty robust and he expects above-potential growth, and that it is unnecessary and unadvisable for the Fed to take an accommodative stance.
The markets are discounting the odds at 3% 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 Tuesday fell by -0.16%. The euro moved lower on Tuesday due to the strength of the dollar. However, threats to the Fed’s independence are limiting gains in the dollar and supporting the euro after Fed Chair Powell said Sunday that the US Department of Justice’s investigation into the Fed’s renovation of its building stems from its refusal to lower interest rates as much as President Trump wanted.
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 Tuesday rose by +0.61%. The yen sank to a 1.5-year low against the dollar on Tuesday after Monday’s report from the Yomiuri newspaper said 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. Markets are concerned 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 Tuesday closed down -15.60 (-0.34%), and March COMEX silver (SIH26) closed up +1.247 (+1.47%).
Gold and silver prices settled mixed on Tuesday, with Mar silver posting a new contract high and nearest-futures Jan silver (SIF26) posting a new record nearest-futures high of $88.61 a troy ounce.
Feb gold fell from a contract high and turned lower after the dollar strengthened. Precious metals prices also fell back from their best levels on hawkish comments from St. Louis Fed President Alberto Musalem, who said it is unnecessary and unadvisable for the Fed to take an accommodative stance.
Tuesday’s weaker-than-expected US Dec core CPI report is dovish for Fed policy and is also bullish for precious metals prices. Concerns about the Fed’s independence are boosting demand for precious metals as a safe haven, 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 Monday. 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. This article was originally published on Barchart.com
