Fed Rate Cut Expectations Drive Dollar Down While Gold Surges to New Heights

The dollar index (DXY) retreated to its lowest point in 1.5 weeks on Friday, closing with a -0.08% loss. The greenback’s weakness was primarily fueled by surging expectations that the Federal Reserve will cut interest rates at the December 9-10 FOMC meeting. Swaps markets have dramatically repriced this scenario, with current pricing showing an 83% probability of a 25 basis point rate reduction—a sharp jump from just 30% a week earlier.

Additional headwinds for the dollar emerged after reports that Kevin Hassett is the leading contender to replace Jerome Powell as Fed Chair. Market participants view Hassett as a dovish policy advocate, which would likely continue accommodative monetary policy. This development raised concerns about Fed independence, as Hassett is known to support the current administration’s preference for lower interest rates. Meanwhile, strength in equities on Friday further diminished safe-haven demand for the dollar.

When Will Fed Cut Rates? Market Signals Point to December Action

The rate cut narrative is reshaping currency dynamics across major pairs. EUR/USD edged up +0.05% as the euro stabilized while the dollar weakened. Supporting euro strength were mixed Eurozone inflation signals: October one-year inflation expectations climbed unexpectedly to 2.8% from 2.7%, while German November CPI accelerated to +2.6% year-over-year, the largest monthly gain in nine months. These readings reflect hawkish factors for ECB policy, though they haven’t deterred expectations of potential Fed action. German October retail sales declined -0.3% month-over-month against expectations of +0.2%, a bearish factor that limited euro gains.

The yen showed resilience amid Japan’s stronger-than-expected economic data. USD/JPY dropped -0.12% as October industrial production surged +1.4% month-over-month and retail sales climbed +1.6%, the strongest in five years. Tokyo’s November CPI held at +2.7% year-over-year, consistent with expectations. However, Japan’s labor market revealed cracks, with the jobless rate unchanged at 2.6% instead of declining to 2.5%, while the job-to-applicant ratio eased to 1.18. These softer labor indicators tempered yen upside momentum, though markets are pricing a 59% probability of a BOJ rate hike at December’s policy meeting.

Precious Metals Rally as Rate Cut When Becomes Market Reality

Gold and silver surged Friday in anticipation of near-term Fed rate cuts. December COMEX gold futures closed up +53.10 points (+1.27%), marking a two-week high, while December silver futures jumped +0.639 (+1.27%), with spot silver reaching an all-time record of $56.46 per troy ounce. The rate cut catalyst is driving investors toward precious metals as inflation hedges and stores of value.

Beyond monetary policy expectations, gold benefited from central bank accumulation momentum. China’s People’s Bank of Gold reserves expanded to 74.09 million troy ounces in October, marking the twelfth consecutive month of increases. Global central banks purchased 220 metric tons of gold during Q3 2024, up 28% from the prior quarter. Geopolitical uncertainties regarding Ukraine peace prospects and U.S. tariff policies continue to provide safe-haven support for bullion markets. Separately, Chinese silver supply tightness is underpinning silver prices, with Shanghai Futures Exchange warehouse inventories at their lowest level in a decade.

The rally faced headwinds from Friday’s stock market strength, which reduced traditional safe-haven demand, and an unexpected technical outage at the Chicago Mercantile Exchange that disrupted metal futures and options trading. Additionally, improved prospects for Ukrainian conflict resolution have tempered some safe-haven appetite. Since their mid-October peaks, both gold and silver ETF holdings have declined after reaching three-year highs on October 21, suggesting some profit-taking pressure in recent sessions.