The dollar index (DXY00) on Friday fell by -0.19%. Friday’s sharp rally in equity markets has reduced liquidity demand for the dollar. The dollar is also being pressured by some negative carryover from Thursday, when weaker-than-expected US labor market news boosted the chance of a Fed rate cut at next month’s FOMC meeting to 19% from 8% on Wednesday. Losses in the dollar were limited from hawkish Fed commentary and after the University of Michigan US Feb consumer sentiment index unexpectedly rose to a 6-month high.
The dollar sank to a 4-year low last Tuesday when President Trump said he’s comfortable with the recent weakness in the dollar. Also, the dollar remains under pressure as foreign investors pull capital from the US amid a growing budget deficit, fiscal profligacy, and widening political polarization.
The University of Michigan US Feb consumer sentiment index unexpectedly rose +0.9 to a 6-month high of 57.3, stronger than expectations of a decline to 55.0.
The University of Michigan US Feb 1-year inflation expectations fell to a 13-month low of 3.5%, weaker than expectations of no change at 4.0%. The Feb 5-10 year inflation expectations ticked up to 3.4%, stronger than expectations of no change at 3.3%.
US Dec consumer credit rose by $24.045 billion, stronger than expectations of $8.000 billion and the largest increase in a year.
Hawkish Fed comments on Friday were supportive of the dollar. Atlanta Fed President Raphael Bostic said, “It’s paramount for the Fed to keep monetary policy in a restrictive posture so that we get inflation back to 2%.” Also, Fed Vice Chair Philip Jefferson said he was “cautiously optimistic” about the US economy’s outlook and that strong productivity growth could help return inflation to the Fed’s 2% target.
Swaps markets are discounting the odds at 19% for a -25 bp rate cut at the next policy meeting on March 17-18.
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.
EUR/USD (^EURUSD) recovered from a 2-week low on Friday and finished up by +0.37%. The euro initially moved lower on Friday after German Dec industrial production fell more than expected. However, the euro recovered its losses and moved higher after the dollar weakened and after better-than-expected German trade news was released.
German Dec industrial production fell -1.9% m/m, weaker than expectations of -0.3% m/m and the biggest decline in four months.
German trade news was better than expected as Dec exports rose +4.0% m/m, stronger than expectations of +1.1% m/m and the biggest increase in 4 years. Dec imports rose +1.4% m/m, stronger than expectations of +0.2% m/m.
Swaps are discounting a 3% chance of a -25 bp rate cut by the ECB at its next policy meeting on March 19.
USD/JPY (^USDJPY) on Friday rose by +0.05%. The yen posted modest losses on Friday after Dec household spending fell more than expected, a dovish factor for BOJ policy. Also, higher T-note yields on Friday weighed on the yen.
Losses in the yen were limited on Friday due to hawkish comments from BOJ board member Masu, who said the BOJ should keep raising interest rates to normalize monetary policy. Also, the unexpected increase in Japan’s Dec leading index CI to a 19-month high is bullish for the yen.
The yen is also under pressure ahead of an expected win by the Liberal Democratic Party, led by Prime Minister Takaichi, in Sunday’s election, which could embolden Ms. Takaichi’s budget stimulus plans and raise the risk of larger deficits.
The Japan Dec leading index CI unexpectedly rose +0.3 to a 19-month high of 110.2, stronger than expectations of a decline to 109.8.
Japan Dec household spending fell -2.6% y/y, weaker than expectations of -0.3% y/y.
BOJ board member Masu said he “is convinced that the BOJ needs to continue raising the benchmark interest rate to complete the process of normalizing its monetary policy settings.”
The markets are discounting a +27% chance of a BOJ rate hike at the next meeting on March 19.
April COMEX gold (GCJ26) on Friday closed up +90.30 (+1.85%), and March COMEX silver (SIH26) closed up +0.181 (+0.24%).
Gold and silver prices settled higher on Friday, with silver recovering from a 7-week low. Friday’s weaker dollar was supportive of metals prices. Silver prices initially fell sharply on Friday as the recent surge in volatility prompted exchanges to raise trading margin limits on precious metals, forcing capitulation and liquidation of losing long positions.
Precious metals are 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 surging as the dollar debasement trade gathers steam. Last Tuesday, President Trump said that he’s comfortable with the recent weakness in the dollar, which sparked 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 of dollar assets and shift into precious metals.
Finally, 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.
Gold and silver plunged from record highs last Friday when President Trump announced he had nominated Keven Warsh as the new Fed Chair, which fueled massive liquidation of long positions in precious metals. Mr. Warsh is one of the more hawkish candidates for Fed Chair and is seen as less supportive of deep interest rate cuts.
Strong central bank demand for gold is supportive of prices, following the recent 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 3.5-year high last Wednesday. Also, long holdings in silver ETFs rose to a 3.5-year high on December 23, though liquidation has since knocked them down to a 2.5-month low on Monday.
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. This article was originally published on Barchart.com
