The dollar index (DXY00) rose slightly +0.02% on Monday. The dollar found support on Monday as weakness in the stock market increased some liquidity demand for the greenback. Also, Monday’s stronger-than-expected pending home sales report supported the dollar.
The dollar fell from its best level after the Dallas Fed’s December manufacturing outlook for general business activity unexpectedly fell.
Markets are discounting the odds by 16% for a -25bp rate cut 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 -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 Fed boosts liquidity in the financial system, having started buying $40 billion a month in Treasury bills in mid-December. The dollar is also undercut by concerns that President Trump intends to appoint a dovish Fed chairman, which would be bearish for the greenback. Mr. Trump recently said he will announce his pick for the next 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 worst candidate.
November pending US home sales rose 3.3% m/m, beating expectations of +0.9% m/m.
The Dallas Fed’s outlook for general business activity in December in the US unexpectedly fell between -0.5 and -10.9 against expectations of a rise to -6.0.
EUR/USD (^EURUSD) fell -0.03% on Monday. The euro came under pressure on Monday after no progress was seen in weekend talks to end the Russian-Ukrainian war. Also, lower eurozone government bond yields are weighing on the euro after the German 10-year bond yield fell to a 3-week low of 2.824% on Monday, weakening euro interest rate spreads.
Swaps are priced at a 0% chance of the ECB raising rates by +25bp at the next policy meeting on February 5th.
USD/JPY (^USDJPY) fell -0.35% on Monday. The yen rose against the dollar on Monday after a summary of the BOJ’s Dec. 19 meeting showed some policymakers noted that Japan’s real interest rate remains very low, suggesting further rate hikes are likely. The yen is also supported today by lower T-bill yields.
Markets are discounting a 0% chance of a BOJ rate hike at the next meeting on January 23rd.
February COMEX gold (GCG26) closed down -209.10 (-4.59%) on Monday and March COMEX silver (SIH26) closed down -6.736 (-8.73%).
Gold and silver plummeted on Monday, with gold hitting a 1.5-week low. Mar silver fell from a high in the contract, and silver futures (Z25) retreated from a record high of $81.85 a troy ounce and settled sharply lower. The December 19 BOJ meeting summary released on Monday weighed on precious metals as it showed some policymakers noted that Japan’s real interest rate remains very low, suggesting further rate hikes are likely. Losses in precious metals accelerated on Monday after the CME raised margin levels for trading, sparking prolonged liquidation pressure.
Precious metal prices are seeing continued support from geopolitical concerns as the US continues its blockade of sanctioned oil tankers linked to Venezuela and launched a military strike against ISIS targets in Nigeria last Thursday.
Underlying factors bullish for precious metals include the FOMC’s Dec. 10 announcement of a $40 billion per month injection of liquidity into the US financial system. Precious metals have safe-haven support tied to uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East and Venezuela. In addition, precious metals are supported by concerns that the Fed will follow an easier monetary policy in 2026 as President Trump intends to appoint a dovish Fed chairman.
Strong demand for gold from the central bank is supporting prices, following recent news that bullion in China’s PBOC reserves rose by more than 30,000 ounces to 74.1 million troy ounces in November, the 13th consecutive month that the PBOC has increased its gold reserves. Additionally, the World Gold Council recently reported that global central banks bought 220 MT of gold in the third quarter, up 28% from the second quarter.
Demand for precious metals funds remains strong, with long holdings in gold ETFs rising to a 3.25-year high last Friday. Also, long holdings in silver ETFs rose to a 3.5-year high last Tuesday.
As of the date of publication, Rich Asplund had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
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