Dollar Falls Ahead of Tuesday's US Payrolls Report

The dollar slipped (-0.09% DXY) ahead of Tuesday’s US payrolls after the Dec Empire manufacturing survey unexpectedly contracted to -3.9 (vs. 10.0 expected) and Fed Governor Stephen Miran called policy “unnecessarily restrictive,” while the Fed’s $40bn/month T‑bill purchases and market talk that President Trump may pick a dovish Fed chair (reportedly Kevin Hassett) added to easing expectations—markets price a ~22% chance of a 25bp cut at the Jan FOMC. FX moves saw EUR/USD rise to a 2.5‑month high on Eurozone industrial production of +0.8% m/m and expectations the ECB is finished cutting, while USD/JPY fell (-0.37%) as upbeat Japan data (Q4 Tankan large manufacturing outlook +3 to 15; Oct tertiary index +0.9% m/m) pushed traders to a ~97% chance of a BOJ 25bp hike. Precious metals gained (Feb gold +0.16%, Mar silver +2.55%) on dollar weakness, lower T‑note yields, Fed liquidity measures and strong central‑bank buying (China PBOC +30k oz to 74.1m oz; global central banks +220 MT in Q3), although BOJ tightening expectations, long‑liquidation pressure since mid‑October and softer Chinese activity (Nov IP +4.8% y/y, retail +1.3% y/y) limit upside for industrial metals.

Analysis

The dollar slipped 0.09% on Monday ahead of the US November payrolls report after the Empire State manufacturing survey unexpectedly contracted, falling 22.6 points to -3.9 versus a 10.0 print expected, and Fed Governor Stephen Miran characterized policy as "unnecessarily restrictive." The dollar also came under pressure from the Fed's renewed liquidity move — purchases of $40 billion per month in T‑bills — and market chatter that President Trump may appoint a dovish Fed chair (Bloomberg names Kevin Hassett), with markets pricing roughly a 22% chance of a 25bp cut at the January 27–28 FOMC meeting.

FX positioning shows divergence: EUR/USD rose 0.09% to a 2.5‑month high supported by Eurozone October industrial production +0.8% m/m and expectations that the ECB is done easing, while USD/JPY fell 0.37% as Japan data surprised on the upside (Q4 Tankan large manufacturing outlook +3 to 15 versus 12 expected; October tertiary index +0.9% m/m) and markets price a ~97% chance of a BOJ 25bp hike. Lower U.S. Treasury yields also boosted demand for the yen and safe‑haven assets.

Precious metals outperformed (Feb gold +0.16%, Mar silver +2.55%) on dollar softness, lower T‑note yields and Fed liquidity, reinforced by strong central bank buying (China PBOC +30,000 oz to 74.1m oz; global central bank purchases +220 MT in Q3). Offsetting risks include anticipated BOJ tightening, long‑liquidation pressure since mid‑October and softer Chinese activity (Nov IP +4.8% y/y; retail +1.3% y/y; new home prices -0.39% m/m), which constrain upside in industrial metals and silver despite tight Shanghai silver inventories (519,000 kg).

Key Decisions for Investors

• Consider modest strategic exposure to gold and gold ETFs as a hedge against dollar weakness and Fed liquidity injections, but size positions conservatively given BOJ tightening risk and recent long‑liquidation in metals
• Lean toward selective EUR/USD exposure or reducing outright dollar exposure given Eurozone IP strength and divergent central bank paths, while avoiding large directional USD positions ahead of US payrolls and Fed‑chair headlines
• Monitor incoming US payrolls, Fed commentary and confirmation of T‑bill purchase pace as triggers to reprice rate‑sensitive duration and FX positions, and use options or hedges to protect against sudden moves if the market reprices Fed easing probabilities