The dollar index (DXY00) is up +0.29% today, rebounding from Tuesday's nearly 4-year low. Weakness in the yen is supporting gains in the dollar today after Treasury Secretary Bessent said the US "absolutely not" intervening in the currency market to support the yen. Market movement is limited ahead of the FOMC decision later today.
The dollar sank to a nearly 4-year low on Tuesday after President Trump said he's comfortable with the recent weakness in the dollar. Also, the dollar continues to be undercut as foreign investors pull capital from the US amid political risks. The markets remain nervous about Greenland, even though Mr. Trump said last Wednesday that there was a framework agreement for increased US access to Greenland and that he would not invade Greenland by military force.
The dollar is also under pressure on US political uncertainty after President Trump on Saturday threatened 100% tariffs on US imports from Canada if Canada signs a trade agreement with China. Canada is seeking other trade partners amid President Trump's liberal use of tariffs during this second administration.
In addition, the dollar is weighed down by speculation that the US might coordinate FX intervention with Japan to boost the yen, which would dovetail with Mr. Trump's apparent view that a weak dollar is good for the US as a stimulus to US exports. The yen rose to a 2.75-month high against the dollar on Tuesday as US authorities reportedly contacted market participants last Friday to check dollar/yen prices, a possible precursor to intervention.
The risk of another partial US government shutdown is also weighing on the dollar. Senate Democrats threatened to block a government funding deal over Department of Homeland Security/ICE funding after the ICE shooting of an ICU nurse in Minnesota on Saturday. There could be a partial government shutdown when the current stopgap funding measure expires this Friday. In addition, the dollar is being undercut by risks to the Federal Reserve's independence, a growing US budget deficit, fiscal profligacy, and widening political polarization.
The markets are discounting the odds at 3% for a -25 bp rate cut at the conclusion of today's FOMC meeting.
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) today is down by -0.82%. The euro is falling back from Tuesday's 4.5-year high on dovish comments from Austrian central bank governor Kocher, who said the ECB would need to consider another interest rate cut if further euro appreciation were large enough to lower inflation projections. Today's economic news was supportive of the euro after the German Feb GfK consumer confidence index rose +2.8 to -24.1, stronger than expectations of -25.5.
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) is up by +0.98% today. The yen is falling back from Tuesday's 2.75-month high against the dollar. Today's rally in the Nikkei stock index to a 1.5-week high has reduced some safe-haven demand for the yen. Also, higher T-note yields today are bearish for the yen. Losses in the yen accelerated today after US Treasury Secretary Bessent said the US is "absolutely not" intervening in the forex market in support of the yen.
The yen had rallied sharply over the past few sessions on speculation that US-Japan joint FX intervention may be forthcoming. US authorities reportedly called major banks last Friday to request dollar/yen quotes, a possible precursor to intervention. Also, Japanese Finance Minister Katayama said Tuesday that officials "will take action" in line with a US-Japanese FX agreement.
The minutes from the December 18-19 BOJ meeting showed some board members expressed rising concern over the extent to which the yen's depreciation is affecting price trends, saying that "in deciding whether to raise the policy interest rate, the BOJ should give consideration to the impact of the yen's depreciation on inflation rates, and in some cases, on underlying inflation."
The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on March 19.
February COMEX gold (GCG26) today is up +152.80 (+3.01%), and March COMEX silver (SIH26) is up +6.993 (+6.60%).
Gold and silver prices are sharply higher today, with Feb gold posting a new contract and a record nearest-futures high of $5,306.00 an ounce. Precious metals soared today after President Trump said late Tuesday that he's comfortable with the recent weakness in the dollar, which sparked demand for the metals as a store of value. Also, 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. Gold and silver prices fell from their best levels today after the dollar spiked higher, following Treasury Secretary Bessent's statement that the US was not intervening in the currency market to support the yen.
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 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 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 on Tuesday. Also, long holdings in silver ETFs rose to a 3.5-year high on December 23.
