Dollar Gains on Weakness in the British Pound and Yen

The dollar is firmer (DXY +0.17%) as weakness in GBP and the yen combine with dovish Fed signals—Governor Waller saying the Fed can steadily cut rates because policy is 50–100bp above neutral—and the Fed’s recent decision to buy $40bn/month of T‑bills; markets price a 24% chance of a 25bp cut at the Jan FOMC while reports that Kevin Hassett is a likely, dovish Trump Fed‑chair pick also weigh on the dollar. Europe and Japan offer mixed signals: EUR/USD is slightly lower (-0.04%) after Eurozone Nov CPI was revised down to 2.1% y/y, Q3 labor costs eased to 3.3% y/y and Germany’s IFO slipped to 87.6 (7‑month low) even as swaps show 0% chance of an ECB cut Thursday; USD/JPY is up ~0.48% as Japan faces fiscal concerns over a possible ¥120tn 2026 budget, a jump in 10‑yr JGB yields to 1.983% (an 18‑year high), stronger Nov exports and a 96%‑priced BOJ hike. Precious metals are rallying (Feb gold +1.0%, Mar silver +4.52%, nearest‑future silver at an all‑time high $65.28/oz) on safe‑haven flows tied to Venezuela tensions, dovish U.S. rate prospects and central‑bank buying (PBOC reserves up to 74.1m oz; global central‑bank gold purchases +28% Q2→Q3), with silver also supported by tight Chinese inventories despite recent ETF outflows.

Analysis

The dollar index is modestly firmer (+0.17%), driven by weakness in GBP/USD after softer UK November CPI and yen weakness amid Japanese fiscal concerns. That upward pressure is offset by dovish signals: Fed Governor Christopher Waller said policy is 50–100bp above neutral and the Fed can steadily cut rates, the Fed has begun buying $40bn/month of T‑bills, and markets price a 24% chance of a 25bp cut at the Jan 27–28 FOMC.

EUR/USD is slightly lower (-0.04%) after Eurozone Nov CPI was revised down to +2.1% y/y, Q3 labor costs eased to +3.3% y/y and the German IFO fell to 87.6, while swaps show 0% chance of an ECB cut this week—data that keep ECB policy relatively restrictive versus the Fed. USD/JPY is up ~0.48% as markets weigh a possible record ¥120tn budget and higher 10‑yr JGB yields (1.983%, an 18‑year high) alongside stronger Nov exports (+6.1% y/y) and Oct core machine orders (+7.0% m/m); the market prices a 96% chance of a BOJ 25bp hike.

Precious metals are rallying—Feb gold +1.0% (+$43.20) and Mar silver +4.52% (+$2.862), with nearest‑future silver at an all‑time high $65.28—on Venezuela tensions, dovish Fed commentary, the Fed's T‑bill purchases and persistent central‑bank buying (PBOC reserves +30,000 oz to 74.1m oz; global central banks bought 220 MT in Q3, +28% q/q). Tight Chinese silver inventories (519,000 kg) and a rebound in silver ETF holdings to a near 3.5‑year high support silver, but earlier long liquidations and recent ETF outflows represent a clear downside risk.

Key Decisions for Investors

• Increase tactical exposure to precious metals via physical, ETFs or near‑dated futures to capture safe‑haven and policy‑driven upside, while applying disciplined profit targets or protective hedges because prior long liquidations could retrace gains
• Trim or hedge USD‑long positions ahead of continuing Fed‑chair headlines and the Jan FOMC, since dovish Fed commentary, $40bn/month T‑bill purchases and the prospect of a dovish Fed Chair present downside risk to the dollar despite recent strength
• Consider short‑term tactical exposure to JPY appreciation or JGB yield volatility around Friday's BOJ meeting—markets price a 96% chance of a 25bp hike—but size positions conservatively given fiscal concerns (possible ¥120tn budget) that could keep the yen volatile
• Avoid initiating large directional euro longs before Thursday's ECB decision and upcoming eurozone data, as revised Nov CPI (2.1% y/y), softer Q3 labor costs and a weak German IFO argue for a wait‑and‑see approach