Mixed Signals Push Dollar Higher as Markets Navigate Policy Uncertainty and Safe-Haven Demand

The US dollar index (DXY) posted modest gains today, climbing +0.17%, as conflicting market forces created a complex trading environment. While the currency found support from weakness in the British pound and Japanese yen, dovish signals from Federal Reserve officials and expectations of an easier monetary policy in 2026 limited upside momentum.

Policy Divergence Drives Currency Swings

Fed Governor Christopher Waller’s comments about maintaining lower interest rates sparked selling pressure on the dollar. His remarks that US rates still sit 50-100 basis points above neutral levels, and that the Fed can steadily reduce them without urgency, signaled a more accommodative path ahead. Markets are currently pricing in only a 24% probability of a 25 basis point rate cut at the January 27-28 FOMC meeting.

Adding to dollar headwinds is speculation about President Trump’s Fed Chair selection. Bloomberg reporting suggests National Economic Council Director Kevin Hassett as the leading candidate—a figure markets perceive as more dovish than current leadership. The announcement is expected in early 2026, creating uncertainty about the Fed’s future direction.

Meanwhile, the Federal Reserve’s decision to purchase $40 billion monthly in Treasury bills has injected liquidity into financial markets, which typically pressures the dollar as investors seek alternative assets.

British Pound Weakness Lifts Dollar

GBP/USD declined today following UK inflation data that came in below expectations. November consumer prices rose less than anticipated, reducing the likelihood of further Bank of England rate hikes and weighing on sterling. This weakness provided the primary support for dollar strength this session.

Japanese Yen Under Pressure from Fiscal Concerns

USD/JPY surged +0.48% as the yen weakened on two fronts. First, the Japanese government’s consideration of a record 120+ trillion yen budget for fiscal 2026 raised fiscal sustainability concerns. Second, despite positive economic data—including November export growth of 6.1% year-over-year and October core machine orders jumping +7.0% month-over-month—the yen faced selling pressure as investors repriced expectations for BOJ tightening.

The markets now assign a 96% probability to a 25 basis point rate hike at Friday’s BOJ policy meeting. However, higher Japanese government bond yields, with the 10-year JGB climbing to an 18-year high of 1.983%, strengthened yen interest rate differentials without preventing overall yen depreciation.

Euro Faces Headwinds from Data and Policy Divergence

EUR/USD traded marginally lower at -0.04%, pressured by a stronger dollar and dovish Eurozone economic data. November CPI was revised downward to +2.1% year-over-year from +2.2%, while Q3 labor costs increased just +3.3% year-over-year—the slowest pace in three years. Germany’s IFO business conditions index unexpectedly fell to an 87.6 reading, marking a 7-month low.

These figures reinforced market expectations that the ECB has completed its rate-cutting cycle, with swaps pricing zero probability of a rate cut at Thursday’s policy meeting. The central bank policy divergence—with the Fed expected to cut while the ECB stays on hold—should theoretically support the euro, but current economic weakness overwhelmed that support.

Precious Metals Surge on Multiple Tailwinds

February COMEX gold climbed +1.00% to fresh highs, while March silver posted exceptional gains of +4.52%, with nearest-futures silver reaching an all-time high of $65.28 per troy ounce.

Safe-haven demand for precious metals intensified following President Trump’s announcement of “a total and complete blockade” of sanctioned oil tankers to and from Venezuela, escalating geopolitical tensions. Fed Governor Waller’s dovish rhetoric reinforced demand for precious metals as inflation hedges, as investors repositioned for lower real interest rates ahead.

Central bank buying provided structural support, with China’s PBOC reserves expanding by 30,000 ounces to 74.1 million troy ounces in November—marking the thirteenth consecutive month of accumulation. Global central banks collectively purchased 220 metric tons of gold in Q3, up 28% from Q2, underscoring institutional confidence in the precious metal as a store of value.

Silver found additional support from tight inventory conditions. Shanghai Futures Exchange warehouse inventories fell to 519,000 kilograms on November 21, the lowest level in a decade, signaling constrained supply. While ETF holdings experienced recent liquidation pressure, silver ETF long holdings rebounded to nearly 3.5-year highs this week, suggesting renewed fund interest.

Broader fiscal concerns in Japan and uncertainty surrounding US tariff policies and Middle Eastern geopolitical risks continued to drive safe-haven flows into precious metals, creating a supportive environment for further gains.