The dollar index (DXY00) on Wednesday rose by +0.19%. The dollar moved higher on Wednesday, following the end of the partial US government shutdown after President Trump late Tuesday signed a deal to fund the government. Also, weakness in stocks on Wednesday boosted some liquidity demand for the dollar. In addition, yen weakness is supportive of the dollar after the yen fell to a 1.5-week low on Wednesday. The dollar added to its gains on the stronger-than-expected Jan ISM services index.
Gains in the dollar were limited, though, after the Jan ADP report showed employers added fewer than expected jobs last month, a dovish factor for Fed policy.
The dollar still has carryover support from last Friday when President Trump nominated Keven Warsh as the next Fed Chair. Mr. Warsh is seen as more hawkish than other Fed Chair candidates and often emphasized inflation risks during his tenure as a Fed Governor from 2006-2011.
The US Jan ADP employment change rose by +22,000, weaker than expectations of +45,000.
The US Jan ISM services index was unchanged at 53.8, stronger than expectations of a decline to 53.5. The prices paid sub-index of the Jan ISM services report rose by +1.5 to 66.6, stronger than the 65.0 expected.
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 markets are discounting the odds at 10% 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) on Wednesday fell by -0.12%. The euro moved lower on Wednesday after the Eurozone Jan core CPI and Jan composite PMI were revised lower, which are dovish for ECB policy. Losses in the euro were limited due to short covering and position squaring ahead of Thursday's ECB meeting.
The Eurozone Jan core CPI was revised downward by -0.1 to 2.2% y/y from the previously reported +2.3% y/y, the smallest pace of increase in four years.
The Eurozone Jan S&P composite PMI was revised downward by -0.2 to 51.3 from the previously reported 51.5.
Eurozone Dec PPI fell -0.3% m/m and -2.1% y/y, right on expectations, with the -2.1% y/y fall the steepest year-over-year decline in 14 months.
Swaps are discounting a 1% chance of a +25 bp rate hike by the ECB at Thursday's policy meeting.
USD/JPY (^USDJPY) on Wednesday rose by +0.73%. The yen added to this week's losses on Wednesday and posted a 1.5-week low against the dollar. The yen is under pressure ahead of an expected win by Prime Minister Takaichi's Liberal Democratic Party in Sunday's election, which could embolden Ms. Takaichi's budget stimulus plans and raise the risks of larger deficits. Higher T-note yields on Wednesday also weighed on the yen. Wednesday's upward revision to the Japan Jan S&P services PMI was supportive for the yen.
The Japan Jan S&P services PMI was revised upward to 53.7 from the previously reported 53.4, the fastest pace of expansion in 11 months.
The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on March 19.
April COMEX gold (GCJ26) on Wednesday closed up +15.80 (+0.32%), and March COMEX silver (SIH26) closed up +1.095 (+1.31%).
Gold and silver prices settled higher on Wednesday, recovering more of the sharp declines seen over the past week. The risk of escalating tensions in the Middle East has boosted 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 Wednesday that the US told Iran that it will not agree to Iran's demands to change the location and format of talks planned for Friday. The development heightened expectations that the US could proceed with military strikes against Iran, boosting safe-haven demand for precious metals.
However, precious metals fell back from their best levels on Wednesday after strength in the dollar sparked long liquidation, 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 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.
Precious metals sold off last Friday and Monday after 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. For more information please view the Barchart Disclosure Policy here.
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