Dollar Weakens as Yen Rallies on BOJ Rate Hike Signals

The dollar in yen terms faced renewed pressure on Monday as market participants reassessed central bank policy divergence. USD/JPY retreated by -0.45% following hawkish rhetoric from BOJ Governor Ueda, who indicated the bank is prepared to increase rates at December’s policy meeting. This shifted sentiment marked a significant reversal from earlier trading sessions, with the Japanese currency climbing to 2-week highs against its US counterpart.

The broader dollar index (DXY) hit a 2-week low, finishing -0.05% on the session. Multiple headwinds accumulated against the greenback: weaker-than-anticipated US manufacturing data from November arrived alongside mounting expectations that the Federal Reserve will cut rates by 25 basis points at the December 9-10 FOMC meeting. Swaps pricing now reflects a 96% probability of this December cut, up sharply from 30% just two weeks prior.

Central Bank Policy Divergence Reshapes Currency Markets

The BOJ’s signals proved decisive in reshaping near-term expectations. Governor Ueda’s comments about “considering the pros and cons of raising the policy interest rate and making decisions as appropriate” triggered a repricing across Asian currency markets. The derivatives market now prices an 86% chance of a December 19 rate hike by the BOJ—a dramatic shift that fundamentally alters the dollar-yen carry trade calculus.

This policy divergence creates a structural headwind for dollar strength. While the Fed remains in cutting mode, the BOJ is contemplating tightening, reversing years of accommodative policy. Market participants must reassess positioning in light of this divergence, particularly those holding long dollar-yen positions that benefited from years of interest rate differentials favoring the greenback.

Manufacturing Data Adds to Dollar Weakness

November’s ISM manufacturing index delivered a disappointing -0.5 print to 48.2, falling short of consensus expectations for a rise to 49.0. This 4-month low signaled economic softening that reinvigorated speculation around Fed rate cuts. However, the ISM prices paid sub-index unexpectedly climbed +0.5 to 58.5, suggesting underlying inflation pressures persist despite headline weakness.

Euro Strength Amid Divergent Policy Paths

EUR/USD advanced +0.09% to 2-week highs as the dollar weakened across the board. ECB Governing Council member and Bundesbank President Nagel reinforced the bank’s hawkish stance, stating that “Eurozone interest rates are currently in a good place.” This messaging, combined with the ECB having completed its rate-cutting cycle while the Fed continues lower, widened the policy differential supporting the single currency.

The Eurozone manufacturing PMI for November was revised downward to 49.6, reflecting the steepest pace of contraction in 5 months. Despite this softness, derivative markets price only a 2% chance of an ECB rate cut in December, underscoring the divergence with Fed expectations.

Precious Metals Rally on Dollar Weakness and Safe-Haven Demand

Gold and silver surged on Monday, with February COMEX gold closing +0.47% and March silver advancing +3.46%. Silver captured particular attention, with the nearest-futures contract (Z25) soaring to an all-time high of $58.48 per troy ounce, while February gold posted a 1.25-month peak.

The dollar index decline to 2-week lows provided direct support for bullion prices. Additionally, expectations for Fed rate cuts underpin demand for precious metals as inflation hedges and stores of value. Perhaps more significantly, speculation that Kevin Hassett could become the next Fed Chair has boosted safe-haven positioning. Hassett is perceived as a dovish, pro-liquidity candidate whose nomination would raise questions about Fed independence given his alignment with President Trump’s rate-cutting preferences.

Central Bank Purchases Underpin Long-Term Gold Demand

China’s PBOC gold reserves reached 74.09 million troy ounces in October, marking the twelfth consecutive month of reserve accumulation. Global central banks purchased 220 metric tonnes of gold in Q3, representing a 28% increase from Q2, according to the World Gold Council. This structural demand floor supports prices despite profit-taking pressures from record highs posted in mid-October.

Silver inventories linked to the Shanghai Futures Exchange fell to 519,000 kilograms on November 21, the lowest level in a decade. Tight supply dynamics, combined with central bank support for gold and uncertainty surrounding US tariff policy and geopolitical risks, maintain safe-haven premium in precious metals pricing.

The market repricing reflects the layering of multiple factors: dollar weakness stemming from Fed rate cut expectations, Japanese yen strength from BOJ policy normalization signals, and underlying safe-haven and inflation-hedge demand for gold and silver. As central banks diverge in their policy directions, the dollar in yen and broader currency markets will likely remain volatile heading into key December policy meetings.