The dollar index (DXY00) rallied to a 4-week high on Thursday and finished up by +0.24%. The dollar moved higher Thursday due to some better-than-expected US economic news. US job cuts last month fell to a 17-month low, and weekly jobless claims rose less than expected, positive factors for the labor market that are hawkish for Fed policy. Also, Q3 non-farm productivity rose, and the trade deficit shrank to a 16-year low, dollar supportive factors.
US Dec Challenger job cuts fell -8.3% y/y to 35,553, a 17-month low and a supportive factor for the US labor market.
US weekly initial unemployment claims rose by +8,000 to 208,000, showing a stronger labor market than expectations of 212,000.
US Q3 non-farm productivity rose +4.9%, close to expectations of +5.0% and the biggest increase in 2 years. Q3 unit labor costs fell by -1.9%, a bigger decline than expectations of -0.1%.
The US Oct trade deficit unexpectedly shrank to -$29.4 billion, better than expectations of widening to -$58.7 billion and the smallest deficit in 16 years.
The markets are discounting the odds at 12% 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) on Thursday fell to a 4-week low and finished down by -0.21%. Thursday's dollar strength weighed on the euro. Also, Thursday's news showing an unexpected decline in Eurozone Dec economic confidence undercut the euro. In addition, an easing of Eurozone producer price pressures is dovish for ECB policy and bearish for the euro, following the Eurozone Nov PPI's steepest decline in 13 months.
Losses in the euro were limited after the Eurozone Nov unemployment rate unexpectedly declined, Nov 1-year inflation expectations rose more than expected, and German Nov factory orders rose by the most in 11 months, hawkish factors for ECB policy.
The Eurozone Dec economic confidence indicator unexpectedly fell -0.4 to 96.7, weaker than expectations of an increase to 97.1.
The Eurozone Nov unemployment rate unexpectedly fell -0.1 to 6.3%, showing a stronger labor market than expectations of no change at 6.4%.
Eurozone Nov PPI fell -1.7% y/y, right on expectations and the biggest decline in thirteen months.
The ECB Nov 1-year inflation expectations were unchanged from Oct at 2.8%, stronger than expectations of 2.7%. The Nov 3-year inflation expectations remained unchanged from Oct at 2.5%, right on expectations.
German Nov factory orders unexpectedly rose +5.6% m/m, stronger than expectations of -1.0% m/m and the biggest increase in 11 months.
ECB Vice President Luis de Guindos said, "The current level of ECB interest rates is appropriate; the latest data are aligning perfectly with our projections. Headline inflation is at 2%, and services inflation, which was our concern, is slowing."
Swaps are pricing in a 0% chance of a +25 bp rate hike by the ECB at the next policy meeting on February 5.
USD/JPY (^USDJPY) on Thursday rose by +0.14%. The yen came under pressure Thursday from a stronger dollar. Also, weaker-than-expected Japanese economic news was bearish for the yen after Dec consumer confidence unexpectedly fell and Nov real cash earnings rose less than expected, both of which are dovish for BOJ policy. In addition, higher T-note yields on Thursday pressured the yen.
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 markets are discounting a 0% chance of a BOJ rate hike at the next meeting on January 23.
February COMEX gold (GCG26) on Thursday closed down -1.80 (-0.04%), and March COMEX silver (SIH26) closed down -2.469 (-3.18%).
Gold and silver prices moved lower on Thursday for a second day. Thursday's rally in the dollar index to a 4-week high has spurred long liquidation in precious 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 due to the reweighting of the BCOM and S&P GCSI indexes, the two largest commodity indexes. Higher T-note yields on Thursday also weighed on precious metals prices.
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.
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 last Tuesday. 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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