The dollar index (DXY00) rallied to a 1-month high on Friday and finished up by +0.20%. The dollar found support from Friday’s mixed US payroll report, which showed payrolls rose less than expected but the unemployment rate ticked down and average hourly earnings rose more than expected, hawkish factors that may keep the Fed from cutting interest rates. The dollar added to its gains on Friday after the University of Michigan’s US Jan consumer sentiment index rose more than expected.
The dollar also rose on Friday after the Supreme Court deferred on the legality of President Trump’s tariffs until next Wednesday. If the Supreme Court were to strike down Mr. Trump’s tariffs, the dollar could come under pressure as the removal of tariff revenue could worsen the US budget deficit.
US Dec nonfarm payrolls rose +50,000, weaker than expectations of +70,000. Also, Nov nonfarm payrolls were revised lower to +56,000 from the previously reported +64,000. The Dec unemployment rate fell -0.1 to 4.4%, showing a stronger labor market than expectations of 4.5%.
US Dec average hourly earnings rose +3.8% y/y, stronger than expectations of +3.6% y/y.
US Oct housing starts unexpectedly fell -4.6% m/m to a 5.5-year low of 1.246 million, weaker than expectations of 1.330 million. Oct building permits, a proxy for future construction, fell -0.2% to 1.412 million, stronger than expectations of 1.350 million.
The University of Michigan US Jan consumer sentiment index rose +1.1 to 54.0, stronger than expectations of 53.5.
The University of Michigan’s US Jan 1-year inflation expectations were unchanged from Dec at 4.2%, stronger than expectations of a decline to 4.1%. The Jan 5-10 year inflation expectations rose to +3.4% from 3.2% in Dec, stronger than expectations of 3.3%.
Friday’s comments from Atlanta Fed President Raphael Bostic were slightly hawkish and supportive of the dollar as he said, “Inflation is too high, and we have to make sure that we don’t lose sight of the fact that even labor markets have gotten cooler and more people are expressing concerns, that we still have this big concern around inflation.”
The markets are discounting the odds at 5% 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) slid to a 1-month low on Friday and finished down by -0.21%. Friday’s dollar strength weighed on the euro. However, losses in the euro were contained after Eurozone Nov retail sales rose more than expected and German Nov industrial production unexpectedly increased, positive factors for the euro.
Eurozone Nov retail sales rose +0.2% m/m, stronger than expectations of +0.1% m/m, and Oct retail sales were revised upward to +0.3% m/m from the previously reported unchanged m/m.
German Nov industrial production unexpectedly rose +0.8% m/m, stronger than expectations of -0.7% m/m.
ECB Governing Council member Dimitar Radev said, “The current level of interest rates can be assessed as appropriate in terms of the available information and the inflation outlook.”
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 Friday rose by +0.66%. The yen tumbled to a 1-year low against the dollar on Friday after Bloomberg reported that the BOJ will keep interest rates unchanged at this month’s policy meeting despite raising its economic growth projection. The yen also came under pressure Friday from a stronger dollar and higher T-note yields. Losses in the yen accelerated on Friday on signs of political instability in Japan after Yomiuri reported that Prime Minister Takaichi is considering dissolving the lower house of the National Diet.
Friday’s Japanese economic news was supportive of the yen after the Nov leading index, CI, rose to a 1.5-year high, and Nov household spending unexpectedly rose by the most in six months.
The yen is also being undercut by an escalation of China-Japan tensions, following China’s announcement 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.
Japanese fiscal concerns continue to pressure the yen, as Prime Minister Takaichi’s government is set to boost defense spending next fiscal year to a record level as part of a 122.3 trillion-yen ($780 billion) budget approved by Japan’s cabinet.
The Japan Nov leading index CI rose +0.7 to a 1.5-year high of 110.5, right on expectations.
Japan Nov household spending unexpectedly rose +2.9% y/y, stronger than expectations of -1.0% y/y and the largest increase in 6 months.
The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on January 23.
February COMEX gold (GCG26) on Friday closed up +40.20 (+0.90%), and March COMEX silver (SIH26) closed up +4.197 (+5.59%).
Gold and silver prices settled sharply higher on Friday after President Trump 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 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.
Friday’s rally in the dollar index to a 4-week high was negative for metals. Also, there are concerns that a broad rebalancing of commodity indexes may be undercutting precious metals prices. Citigroup estimates there could be outflows of $6.8 billion from gold futures contracts and roughly the same from silver over the next week due to the reweighting of the BCOM and S&P GCSI indexes, the two largest commodity indexes. Friday’s rally in the S&P 500 to a new record high also reduced safe-haven demand for precious metals.
Strong central bank demand for gold is supportive of prices, following 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 Thursday. 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. For more information please view the Barchart Disclosure Policy here.
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