The Dollar Index (DXY00) fell from a 3-week high on Monday and ended down -0.16%. The dollar fell on Monday after the December US ISM manufacturing index contracted unexpectedly, its biggest contraction in fourteen months. Additionally, Monday’s rise in stocks dampened liquidity demand for the dollar.
The dollar initially rose on Monday as escalating geopolitical risks in Venezuela boosted safe-haven demand for the dollar following the capture of Venezuelan President Maduro by the United States, and U.S. President Trump said the United States planned to temporarily “rule” Venezuela. On Monday, hawkish remarks from Minneapolis Fed President Neel Kashkari supported the dollar after he said U.S. interest rates could be “close to neutral” for the economy.
The December U.S. ISM manufacturing index unexpectedly fell -0.3 to 47.9, below expectations for an increase to 48.4 and the fastest pace of contraction in 14 months.
On Saturday, Philadelphia Fed President Anna Paulson said, “I see inflation moderating, the job market stabilizing, and growth approaching 2 percent this year. If all of that happens, then some modest additional adjustments to the funds rate would likely be appropriate later in the year.”
Markets are discounting the likelihood of a -25 basis point rate cut to 16% at the next FOMC meeting on January 27-28.
The dollar continues to experience underlying weakness as the FOMC is expected to cut interest rates by around -50 basis points in 2026, while the BOJ is expected to raise rates by another +25 basis points in 2026 and the ECB is expected to leave rates unchanged in 2026.
The dollar is also under pressure as the Fed increases liquidity in the financial system, having started buying $40 billion worth of Treasuries per month in mid-December. The dollar is also weakened by concerns that President Trump intends to appoint a dovish Fed chairman, which would be bearish for the dollar. Mr. Trump recently said he would announce his pick for the new Fed chairman in early 2026. Bloomberg reported that National Economic Council Director Kevin Hassett would be the most likely choice as the next Fed chairman, seen by markets as the most dovish candidate.
EUR/USD (^EURUSD) recovered from a 3-week low on Monday and finished up +0.06%. The euro rebounded after weak news on the US manufacturing sector sent the dollar lower. The euro’s gains were limited as falling German Bund yields on Monday narrowed the euro’s interest rate differentials, weighing on the currency.
Swaps estimate the probability of a +25 basis point rate hike by the ECB at the next policy meeting on February 5 at 0%.
USD/JPY (^USDJPY) fell -0.38% on Monday. The yen recovered from a 2.5-week low against the dollar on Monday and advanced as short coverings emerged following hawkish comments from BoJ Governor Ueda, who said the BoJ would continue to raise interest rates if its economic outlook was realized. The yen also received support after the yield on Japan’s 10-year JGB bonds climbed to a 27-year high of 2.129% on Monday, strengthening yen interest rate differentials. Additionally, the fall in Treasury yields on Monday was bullish for the yen.
The yen initially fell on Monday amid Japanese fiscal concerns, as Prime Minister Takaichi’s government prepares to increase defense spending for the next fiscal year to a record level as part of a 122.3 trillion yen ($780 billion) budget approved by the Japanese cabinet.
Markets are pricing in a 0% chance of a BoJ rate hike at the next meeting on January 23.
February COMEX gold (GCG26) closed Monday up +121.90 (+2.82%) and March COMEX silver (SIH26) closed up +5.642 (+7.94%).
Gold and silver prices rose sharply on Monday amid escalating geopolitical risks in Venezuela, which boosted safe-haven demand for precious metals. The United States captured Venezuelan President Maduro over the weekend, and US President Trump said the United States plans to temporarily “rule” Venezuela. Additionally, dovish remarks from Philadelphia Fed President Anna Paulson fueled demand for precious metals as a store of value when she said she expected the Fed to continue cutting interest rates later this year. Precious metals added to their gains on Monday when the dollar fell from a three-week high and moved lower. Silver prices also received some support following Monday’s rally in copper, which hit a new all-time high.
Precious metals enjoy continued support amid safe-haven demand, amid uncertainty over U.S. tariffs and geopolitical risks in Ukraine, the Middle East and Venezuela. Additionally, precious metals are supported by fears that the Fed will pursue a looser monetary policy in 2026, with President Trump intending to appoint a dovish Fed chairman. 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 per month liquidity injection into the U.S. financial system.
Strong central bank demand for gold is supporting prices, following the recent announcement that bullion held in Chinese PBOC reserves increased by +30,000 ounces to 74.1 million troy ounces in November, the thirteenth consecutive month that the PBOC has increased its gold reserves. Additionally, the World Gold Council recently reported that global central banks purchased 220 tonnes of gold in the third quarter, an increase of +28% from the second quarter.
Fund demand for precious metals remains strong, with long positions in gold ETFs hitting a 3.25-year high last Tuesday. Additionally, long positions in silver ETFs hit a 3.5-year high on December 23.
As of the date of publication, Rich Asplund did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data contained in this article are for informational purposes only. This article was originally published on Barchart.com
