Dollar Index Edges Higher on Mixed Signals, While EUR/USD Faces Headwinds

The dollar index ( DXY00 ) posted a measured increase of +0.05% on Thursday, as the world’s reserve currency found footing amid conflicting economic indicators and shifting monetary policy expectations. The modest rebound came after early morning losses, with the dollar recovering ground as the euro-to-dollar (EUR/USD) pairing retreated by -0.14%.

Central Bank Policy Divergence Pressures Currency Markets

The dollar’s trajectory remained constrained by multiple headwinds stemming from Federal Reserve policy signals. Markets are now discounting a 27% probability that the FOMC will authorize a 25 basis point reduction in the fed funds target range at its January 27-28 meeting. This dovish policy outlook has been exacerbated by persistent rumors that President Trump plans to nominate a soft-stance Fed Chair in early 2026, with Bloomberg reporting that National Economic Council Director Kevin Hassett represents the market’s preferred dovish candidate.

Compounding these concerns, the Federal Reserve commenced a liquidity injection program last Friday, purchasing $40 billion monthly in T-bills—a move that continues to weigh on dollar valuations. The expanding money supply typically pressures currency strength as investors seek alternative stores of value.

Meanwhile, the European Central Bank maintained its deposit facility rate at 2.00% as anticipated, but signaled a pivot in its interest rate cutting cycle. ECB officials indicated that the easing phase has likely concluded based on updated forecasts for growth and inflation. ECB President Lagarde reinforced a hawkish tilt by characterizing the Eurozone economy as “resilient,” a comment that initially supported the euro but was subsequently overwhelmed by fiscal concerns.

Germany’s announcement that it will increase federal debt sales by approximately 20% next year to a record 512 billion euros ($601 billion) created substantial headwinds for the euro complex, suggesting underlying fiscal vulnerabilities despite surface-level economic resilience rhetoric.

Economic Data Surprises Trigger Market Reassessment

US economic releases on Thursday painted a complex picture for the greenback. Weekly initial jobless claims declined by 13,000 to 224,000, aligning closely with market expectations of 225,000—a minor positive for dollar bulls. However, this employment data was overshadowed by weaker-than-anticipated inflation readings.

November consumer price inflation rose just +2.7% year-over-year, substantially below the anticipated +3.1% increase. Core CPI, excluding food and energy, expanded +2.6% annually—missing the +3.0% consensus and marking the slowest pace in 4.5 years. This disinflationary trend prompted recalibration of Fed rate-cut probabilities.

The Philadelphia Federal Reserve’s December business outlook survey proved decidedly disappointing, declining -8.5 points to -10.2 against expectations for an improvement to +2.3. This weakness in forward-looking manufacturing sentiment raised fresh doubts about near-term economic momentum and reinforced expectations for extended monetary accommodation.

Yen and Precious Metals React to Rate Expectations

The USD/JPY pairing declined -0.08% on Thursday as the Japanese yen strengthened amid dollar weakness and declining T-note yields. Market participants have priced in a 96% probability that the Bank of Japan will raise its policy rate by 25 basis points at Friday’s meeting. This potential tightening cycle contrasts sharply with Fed easing expectations, creating powerful support for yen appreciation.

Japanese fiscal dynamics, however, inject uncertainty into this narrative. Kyodo reported that the Japanese government is considering a record budget exceeding 120 trillion yen ($775 billion) for fiscal 2026, introducing medium-term yen pressure from expanded fiscal deficits.

Precious Metals Navigate Safe-Haven and Monetary Policy Crosscurrents

February COMEX gold futures declined -9.40 points (-0.21%) while March COMEX silver retreated -1.682 points (-2.51%), as equity market strength on Thursday diminished safe-haven demand for precious metals. The Bank of England’s 25 basis point rate cut earlier in the week initially supported metals by lowering opportunity costs, but hawkish commentary from BOE Governor Bailey—noting that the bar for additional cuts has risen—subsequently pressured prices.

The BOJ’s anticipated 25 basis point tightening at Friday’s meeting created additional headwinds for precious metals valuations, as higher Japanese rates typically reduce emerging market demand and support yield-bearing alternatives.

Offsetting these pressures, Thursday’s softer-than-expected US inflation and manufacturing data created a dovish backdrop for Fed policy, lending fundamental support to gold and silver as potential beneficiaries of extended monetary ease. Central bank demand remains robust, with China’s PBOC increasing its bullion holdings by 30,000 ounces to 74.1 million troy ounces in November—marking the thirteenth consecutive month of reserve accumulation. The World Gold Council reported that global central banks purchased 220 metric tons of gold in Q3, representing a +28% increase from Q2.

Silver inventories in Shanghai Futures Exchange-linked warehouses fell to 519,000 kilograms on November 21, reaching the lowest level in a decade. Despite long liquidation pressures following mid-October record highs, silver ETF holdings rebounded to nearly 3.5-year highs on Tuesday, suggesting renewed institutional appetite ahead of potential interest rate normalization cycles across major economies.

Geopolitical risk premiums related to US tariff policy and tensions in Ukraine, the Middle East, and Venezuela continue to support precious metals as portfolio hedges, particularly given expectations that a dovish Fed leadership under Trump administration policy could extend the monetary easing cycle into 2026.