Central Bank Moves Drive Major Currency Shifts; Dollar Gains Momentum While Yen Sign Weakens

The dollar index (DXY) climbed to 1-week highs today, posting a +0.18% gain as multiple factors aligned to support US currency strength. The most immediate catalyst came from yen weakness, with USD/JPY surging +1.20% to push the Japanese currency to 4-week lows. Adding fuel to the dollar’s advance, New York Fed President John Williams delivered dovish-leaning comments that paradoxically strengthened the greenback—he characterized recent economic data as “pretty encouraging” and dismissed concerns about labor market deterioration, indicating there’s “no urgency to need to act further on monetary policy right now.”

Economic Data Sends Mixed Signals

The economic calendar delivered contradictory messages today. Existing home sales in November ticked up 0.5% month-over-month to a 9-month peak of 4.13 million units, though this fell slightly short of 4.15 million expectations. Meanwhile, consumer sentiment figures turned weaker than anticipated, with the University of Michigan’s December index revised downward by 0.4 points to 52.9, significantly missing the upward revision forecast to 53.5. Inflation expectations shifted in the opposite direction—the 1-year inflation gauge rose unexpectedly to 4.2% from 4.1%.

Williams projected US GDP growth between 1.5% to 1.75% this year with acceleration anticipated next year, reinforcing the Fed’s patient stance on additional rate reductions. Market pricing currently reflects just a 20% probability of a 25 basis point rate cut when the FOMC convenes on January 27-28.

Yen Sign Deteriorates Despite BOJ Tightening

The Bank of Japan executed its widely-expected 25 basis point rate hike, bringing the overnight call rate to 0.75%, yet the yen sign weakened significantly against the dollar. This counterintuitive move reflects broader concerns about Japanese fiscal sustainability. The government is reportedly considering a record budget exceeding 120 trillion yen ($775 billion) for fiscal 2026, which concerns markets despite the BOJ’s hawkish stance. Japanese 10-year government bond yields climbed to a 26-year peak of 2.025%, yet failed to support the yen currency.

BOJ Governor Ueda adopted a cautious tone regarding future rate hikes, suggesting the pace will depend on economic and price developments. Markets have priced zero probability of another rate hike at January’s 23rd policy meeting. November inflation data came in line with expectations at +2.9% year-over-year, with core readings also matching forecasts at +3.0%.

Euro Tumbles on Recession Fears and Fiscal Strain

The euro tumbled to 1-week lows, with EUR/USD declining 0.04%. German economic data disappointed across the board—November producer prices fell 2.3% year-over-year, marking the steepest 20-month decline and undershooting the -2.2% estimate. Consumer confidence proved even more concerning, with January’s GfK index plummeting 3.5 points to -26.9, a 1.75-year low that badly missed the -23.0 projection for a rebound.

Eurozone fiscal challenges compounded euro weakness when Germany announced plans to boost federal debt sales by nearly 20% next year, reaching a record 512 billion euros ($601 billion) to finance expanded government spending. Such announcements signal monetary tightness ahead, with markets now pricing zero odds of an ECB rate cut at February’s 5th policy meeting.

Precious Metals Rally on Fed Cut Hopes

February COMEX gold advanced $10.90 (+0.25%) while March silver jumped $1.311 (+2.01%). The precious metals complex drew support from weaker-than-expected US economic prints, which bolstered expectations for additional Fed accommodation. November’s core inflation report revealed price growth at 4.5-year lows, combining with today’s downward consumer sentiment revision to strengthen the case for rate cuts.

Geopolitical risks—including tariff uncertainty, Ukraine tensions, Middle East developments, and Venezuelan instability—provided safe-haven demand for precious metals. Concerns that incoming Fed leadership could pursue easier policies in 2026 further supported bullion as investors hedged policy uncertainty.

Offsetting these supports, a stronger dollar typically pressures metal prices, as did today’s rising global bond yields and the BOJ’s rate hike reducing demand for metals as alternative stores of value. Hawkish Fed commentary also weighed on sentiment.

On the positive side, central bank demand remained robust. China’s PBOC gold reserves expanded by 30,000 ounces to 74.1 million troy ounces in November—marking the thirteenth straight month of accumulation. The World Gold Council reported that global central banks purchased 220 metric tons in Q3, a +28% jump from Q2 levels.

Silver benefited from tight supply dynamics, with Shanghai Futures Exchange warehouse inventories falling to 519,000 kilograms on November 21—a 10-year low. Though long liquidation pressures emerged following October’s record highs as ETF holdings retreated, silver ETF demand rebounded sharply this week, reaching near 3.5-year highs.