Greenback Retreats as Gold Surges on Mounting Fed Rate Cut Bets

Market Sentiment Shifts on Policy Expectations

Global currency and precious metals markets finished Friday with a clear directional theme: weakness in the dollar coupled with strength in safe-haven assets. The dollar index (DXY) retreated to a 1.5-week low, concluding the session down -0.08% as market participants recalibrated their interest rate expectations. The shift in sentiment stems from derivatives markets now pricing an 83% probability of a Federal Reserve rate cut at the December 9-10 FOMC meeting—a dramatic jump from just 30% the previous week. This repricing of monetary policy odds undercut dollar demand and boosted appetite for alternative assets, particularly precious metals.

Beyond rate expectations, political developments added another layer of downward pressure on the greenback. Reports surfaced indicating Kevin Hassett as the leading candidate to replace Jerome Powell as Fed Chair. Market observers view Hassett’s dovish orientation and alignment with administration rate-cutting preferences as potentially problematic for dollar strength and central bank independence, further weighing on the currency.

Mixed Performance Across Major Pairs

The euro finished Friday slightly higher, with EUR/USD gaining +0.05% despite early weakness. The currency found support from inflation data surprises. Eurozone one-year inflation expectations unexpectedly climbed to +2.8% (from +2.7%), while Germany’s November CPI rose +2.6% year-over-year—the fastest pace in nine months—both factors that could restrain ECB rate-cutting ambitions. A disappointing German retail sales report (-0.3% month-over-month versus +0.2% expectations) provided a countercurrent, but the hawkish inflation readings ultimately prevailed in supporting the euro. Swap markets show only a 2% probability the ECB cuts rates at its December 18 meeting.

The Japanese yen registered more substantial gains, with USD/JPY declining -0.12%. Better-than-expected industrial production (+1.4% m/m versus -0.6% forecast) and robust retail sales data (+1.6% m/m, the largest five-year increase) buoyed the yen. Tokyo’s November CPI held steady at +2.7% year-over-year, reinforcing BOJ hawkish factors. However, labor market softness tempered yen enthusiasm—Japan’s jobless rate remained flat at 2.6% when a decline to 2.5% was anticipated, and the job-to-applicant ratio eased to 1.18 from expected 1.20. The yen also surrendered gains after US Treasury yields rebounded.

Gold and Silver Rally Sharply on Safe-Haven Demand

December COMEX gold futures finished up +53.10 (+1.27%), posting a two-week high, while December COMEX silver surged +0.639 (+1.27%), with spot silver hitting an all-time record above $56.46 per troy ounce. The rally in precious metals reflects multiple supportive dynamics. Foremost among them: escalating Fed rate-cut expectations make yield-bearing assets less attractive, enhancing the appeal of non-yielding precious metals as value stores. The Hassett nomination narrative amplified this dynamic by raising questions about policy independence.

Additional bullish factors supported the complex. Underlying geopolitical uncertainties, US tariff deliberations, and safe-haven positioning provided structural demand. Central bank accumulation continued to reinforce the gold picture—China’s PBOC reported October holdings reached 74.09 million troy ounces, marking the twelfth consecutive monthly increase. Global central banks collectively purchased 220 MT during Q3, representing a 28% sequential increase from Q2.

Silver specifically benefited from supply tightness narratives. Warehoused inventories connected to the Shanghai Futures Exchange declined to their lowest level in a decade, supporting price appreciation. Counterbalancing these gains, however, was Friday’s equity market rally, which reduced safe-haven demand pressures, and improving expectations regarding Ukrainian conflict resolution, which similarly diminished defensive positioning. A technical disruption at the Chicago Mercantile Exchange briefly subdued trading activity in precious metals derivatives.

Technicals and Positioning Paint Complicated Picture

Long liquidation pressures persisted as a headwind following October’s record highs. Holdings within gold and silver ETFs have retreated after reaching three-year peaks on October 21, suggesting some profit-taking alongside the Friday rally. Nonetheless, the fundamental drivers supporting precious metals—policy accommodation expectations, central bank demand, supply constraints, and geopolitical risk premiums—remain intact and support constructive medium-term positioning for bullion.