Mixed Dollar Performance as Market Digests Fed Uncertainty and EUR/USD Volatility

The dollar index recorded a marginal uptick of +0.05% on Thursday, recovering from initial weakness to finish with modest positive performance. This modest gain came despite multiple headwinds that have been challenging dollar strength throughout the session, with EUR/USD serving as a key barometer of overall greenback momentum.

Market-Moving Factors Behind Dollar Weakness

The dollar’s early slide stemmed from disappointing US economic releases that suggested the Federal Reserve may maintain its accommodative stance. November’s Consumer Price Index came in at +2.7% year-over-year, undershooting forecasts of +3.1%, while core inflation printed at +2.6% annually—marking the smallest increase in 4.5 years and falling short of the anticipated +3.0%. These softer inflation readings spooked risk sentiment, raising questions about the pace of future Fed tightening.

Adding to downward pressure, the December Philadelphia Federal Reserve business outlook survey collapsed by 8.5 points to -10.2, defying expectations for an improvement to 2.3. Such weakness in regional manufacturing sentiment reinforced dovish monetary policy expectations and undermined dollar support.

President Trump’s signaled intentions to appoint a dovish Federal Reserve Chair in early 2026 have introduced additional uncertainty weighing on the greenback. Market speculation points to National Economic Council Director Kevin Hassett as the leading candidate—a selection viewed as particularly dovish by traders. Pricing data shows markets are currently assigning just a 27% probability to a 25 basis point Fed rate cut at the January 27-28 FOMC meeting.

Supportive Factors Limiting Losses

The dollar regained some footing after US weekly initial jobless claims fell by 13,000 to 224,000, closely aligning with expectations of 225,000 and suggesting labor market resilience. This modest positive print provided some dollar support amid otherwise negative headlines.

Liquidity expansion from the Federal Reserve—including its newly implemented $40 billion monthly T-bill purchase program beginning last Friday—has undermined traditional dollar safety demand. Simultaneously, strength in global equity markets reduced investor appetite for traditional dollar holdings as a risk hedge, redirecting capital flows away from the currency.

EUR/USD Retreats Despite Mixed ECB Signals

The EUR/USD pair declined by -0.14% on Thursday, surrendering early session gains after the European Central Bank’s decision and subsequent commentary. Initially, the euro found support as the ECB maintained interest rates unchanged at the 2.00% deposit facility rate while upgrading its 2025 Eurozone GDP growth forecast to 1.4% from the prior 1.2%.

ECB President Christine Lagarde’s assessment that the Eurozone economy has proven “resilient” and her acknowledgment of elevated inflation uncertainty provided temporary euro support. However, this hawkish rhetoric failed to sustain gains after Bloomberg reported that ECB officials increasingly view the rate-cutting cycle as largely concluded, with market swaps pricing only a 1% chance of another 25 basis point reduction at February’s policy meeting.

Fiscal concerns in the Eurozone added additional headwinds to EUR/USD performance. Germany announced plans to boost federal debt issuance by nearly 20% next year, reaching a record 512 billion euros ($601 billion) to fund expanded government expenditure. This expansionary fiscal backdrop, combined with the ECB’s tightening bias shift, pressured the shared currency and supported the dollar’s modest recovery.

Yen Appreciation Amid BOJ Rate Hike Expectations

USD/JPY traded lower by -0.08% on Thursday as the Japanese yen strengthened against the greenback. Expectations that the Bank of Japan will implement a 25 basis point rate increase at Friday’s policy meeting—priced at 96% probability by derivatives markets—buttressed yen demand as the higher rate differential attracted carry unwinding.

Lower US Treasury note yields on Thursday also supported the yen, reducing the appeal of dollar-carrying strategies. Japanese fiscal concerns provided some countervailing headwind, after Kyodo reported the government is contemplating a record 120 trillion yen ($775 billion) budget for fiscal 2026.

Precious Metals Under Pressure from Mixed Signals

February COMEX gold futures descended 9.40 points (-0.21%), while March COMEX silver fell 1.682 points (-2.51%). Precious metals faced selling pressure as equity market strength reduced their traditional safe-haven appeal. Hawkish commentary from central bank officials—including Lagarde’s remarks on eurozone resilience and Bank of England Governor Bailey’s signal that the bar for additional rate cuts has risen—weighed on bullion demand.

Expectations for Friday’s BOJ rate hike added additional headwinds to precious metals, as higher Japanese rates reduce the relative attractiveness of non-yielding assets. Silver, which has rallied sharply over the past three weeks to record highs on Wednesday, experienced particular long liquidation and profit-taking pressures as dollar strength resurfaced.

Nevertheless, precious metals found support from the Bank of England’s decision to reduce rates by 25 basis points, boosting demand for hard assets as financial stores of value. Thursday’s softer-than-expected US inflation and regional manufacturing data reinforced dovish Fed policy expectations, providing bullish undertones for gold and silver.

Geopolitical uncertainty surrounding US tariff policies and instability in Ukraine, the Middle East, and Venezuela continues driving safe-haven precious metals demand. Concerns that President Trump’s dovish Fed Chair appointment will result in easier US monetary policy in 2026 provide structural support for bullion prices.

Central Bank Demand Sustains Gold Momentum

Strong institutional support from central banks continues underpinning precious metals. China’s People’s Bank of China increased gold reserves by 30,000 troy ounces to 74.1 million ounces in November—the thirteenth consecutive month of reserve accumulation. The World Gold Council reported global central banks purchased 220 metric tons of gold during Q3, representing a +28% increase from Q2 activity.

Silver inventories linked to the Shanghai Futures Exchange have tightened dramatically, with warehouse stocks falling to 519,000 kilograms on November 21—the lowest level recorded in a decade. Despite record-high silver prices in mid-October triggering sustained liquidation pressures and declining ETF holdings from October 21 peaks, fund demand has rebounded with long positioning in silver ETFs reaching nearly 3.5-year highs on Tuesday.