The dollar index (DXY00) rose +0.19% on Wednesday. The dollar rose on Wednesday, following the end of the partial shutdown of the US government after President Trump signed a deal to fund the government late on Tuesday. Also, weakness in stocks on Wednesday fueled some demand for liquidity for the dollar. Also, yen weakness supports the dollar after the yen fell to a 1.5-week low on Wednesday. The dollar added to its gains on a stronger-than-expected Jan ISM services index.
The dollar’s gains were limited, however, after the January ADP report showed employers added fewer jobs than expected last month, a favorable factor for Fed policy.
The dollar still has support for the carryover from last Friday, when President Trump named Keven Warsh as the next Fed chairman. Mr. Warsh is seen as more hawkish than other Fed chair candidates and often emphasized the risks of inflation during his tenure as Fed governor from 2006 to 2011.
US January ADP employment change rose by +22,000, weaker than expectations of +45,000.
The US ISM services index was unchanged at 53.8, stronger than expectations for a decline to 53.5. The sub-index of prices paid in the January ISM services report rose +1.5 to 66.6, stronger than the 65.0 expected.
The dollar sank to a four-year low last Tuesday as President Trump said he was comfortable with the greenback’s recent weakness. In addition, the dollar remains under pressure as foreign investors pull capital out of the US amid a growing budget deficit, fiscal attrition and growing political polarization.
Markets are discounting the 10% odds for a -25bp rate cut at the next policy meeting on March 17-18.
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.
EUR/USD (^EURUSD) fell -0.12% on Wednesday. The euro edged lower on Wednesday after the euro zone’s January core CPI and January composite PMI were revised downwards, which are supportive of ECB policy. Losses in the euro were limited due to short covering and square positioning ahead of Thursday’s ECB meeting.
January core CPI for the eurozone was revised down by between -0.1% and 2.2% year-on-year from the previously reported +2.3% year-on-year, the smallest pace of increase in four years.
The January S&P Eurozone Composite PMI was revised down by -0.2 to 51.3 from the previously reported 51.5.
Eurozone December PPI fell -0.3% m/m and -2.1% y/y, just in line with expectations, with the -2.1% y/y drop the sharpest y/y drop in 14 months.
Swaps are discounting a 1% chance of a +25bp rate hike by the ECB at Thursday’s policy meeting.
USD/JPY (^USDJPY) rose +0.73% on Wednesday. The yen added to this week’s losses on Wednesday and hit a 1.5-week low against the dollar. The yen is under pressure ahead of an expected victory for Prime Minister Takaichi’s Liberal Democratic Party in Sunday’s election, which could cheer Ms Takaichi’s budget stimulus plans and raise risks of bigger deficits. Higher T-bill yields on Wednesday also weighed on the yen. Wednesday’s upward revision to Japan’s S&P services PMI supported the yen.
Japan’s S&P services PMI was revised up to 53.7 from 53.4 reported earlier, the fastest pace of expansion in 11 months.
Markets are discounting a 0% chance of a BOJ rate hike at the next meeting on March 19.
April COMEX gold (GCJ26) closed up +15.80 (+0.32%) on Wednesday, and March COMEX silver (SIH26) closed up +1.095 (+1.31%).
Gold and silver prices rose on Wednesday, recovering more from sharp declines seen over the past week. The risk of escalating tensions in the Middle East has increased safe-haven demand for precious metals after the US Navy on Tuesday shot down an Iranian drone that had “aggressively approached” a US aircraft carrier in the Arabian Sea. Also, Axios reported on Wednesday that the US told Iran that it will not accept Iran’s demands to change the location and format of the talks scheduled for Friday. The development raised expectations that the US could pursue military strikes against Iran, boosting demand for safe-haven precious metals.
However, the precious metals retreated from their best levels on Wednesday after a strong dollar led to a long sell-off, sending prices back from their highs.
Precious metals are also supported by safe-haven demand amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East and Venezuela. Also, precious metals are rising as the dollar downgrade trade gains momentum. Last Tuesday, President Trump said he is comfortable with the dollar’s recent weakness, which has fueled demand for metals as a store of value. In addition, US political uncertainty, large US deficits and uncertainty regarding government policies are prompting investors to cut holdings in dollar assets and switch to precious metals.
Finally, increased liquidity in the financial system is increasing demand for precious metals as a store of value, following the FOMC’s December 10th announcement of a $40 billion per month injection of liquidity into the US financial system.
Precious metals sold off last Friday and Monday after President Trump announced that he had named Keven Warsh as the new Fed chairman, prompting a massive liquidation of long positions in precious metals. Mr. Warsh is one of the more aggressive candidates for Fed chairmanship and is seen as less favorable to deep interest rate cuts.
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 74.15 million troy ounces in December, the 14th 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 gold ETF holdings rising to a 3.5-year high last Wednesday. Also, silver ETF longs rose to a 3.5-year high on Dec. 23, although the selloff has pushed them to a 2.5-month low on Monday.
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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