Fed's Hawkish Pivot Fuels Dollar Surge While Gold Finds Support in Policy Divergence

The dollar index (DXY) climbed +0.65% on Wednesday to reach its highest level in two weeks, driven by a dramatic reversal in rate-cut expectations. What triggered this shift? The Bureau of Labor Statistics’ decision to cancel publication of the October employment report eliminated crucial data ahead of December’s FOMC gathering, effectively slashing the probability of a December rate-cut from 70% to just 28%. This single announcement alone reshaped market positioning across multiple asset classes.

Fed Minutes Cement the Hawkish Case

The real hammer blow came from the October 28-29 FOMC meeting minutes, which revealed that “many” officials now support maintaining steady interest rates through the remainder of 2025. This hawkish messaging sent ripples through currency and commodity markets. Traders reassessed their Fed-cut assumptions, with the market now pricing in only a 28% chance of a 25 basis-point rate reduction at the December 9-10 FOMC meeting. The shift from dovish to hawkish expectations created immediate dollar strength as investors repriced higher US interest rates relative to other central banks.

Currency Casualties: Yen Tumbles, Euro Weakens

USD/JPY rallied +0.95% on Wednesday, with the yen tumbling to a 10-month low against the dollar. The breakdown stemmed from dovish comments by Goushi Kataoka, an advisor to Japanese Prime Minister Takaichi, who signaled that the Bank of Japan is unlikely to hike rates before March. Adding fuel to this fire, Kataoka mentioned the government is preparing a supplementary budget of approximately 20 trillion yen ($129 billion) to stimulate domestic demand—far larger than last year’s 13.9 trillion yen package. Concerns about Japan’s mounting debt burden pressured the yen further despite some supportive data: September core machine orders surged +4.2% month-over-month, the strongest performance in six months, and the 10-year Japanese government bond yield reached a 17-year peak of 1.781%.

EUR/USD retreated -0.46% to a 1.5-week low, weighed down by the stronger dollar. However, losses remained contained after reports suggested the Trump administration has been working with Russia on a potential Ukraine peace framework. More structurally, the divergence between central banks supports the euro over the medium term: the ECB appears largely done with rate cuts while the Fed is expected to trim rates multiple times through 2026. Current swap pricing reflects only a 4% probability of a 25 basis-point ECB cut at December’s policy meeting.

Trade Data Bolsters Dollar, But Economic Fundamentals Are Mixed

US trade data offered additional support for the dollar. August’s trade deficit narrowed to -$59.6 billion from -$78.2 billion in July, beating expectations of -$60.4 billion. Meanwhile, US MBA mortgage applications slid -5.2% for the week ended November 14, with the purchase index down -2.3% and refinancing down -7.3%. The average 30-year fixed-rate mortgage edged up 3 basis points to 6.37% from 6.34%, reflecting the market’s shift toward higher-for-longer rate expectations.

Gold and Silver Navigate Policy Crosscurrents

December COMEX gold closed +16.30 points (+0.40%) while December COMEX silver gained +0.333 (+0.66%), recovering ground after a bruising week. The Barchart analysis highlights that precious metals are caught between competing forces. On one hand, dovish BOJ signals and broader monetary uncertainty continue to support gold as a safe-haven store of value. Central bank demand remains robust: China’s PBOC increased its gold reserves to 74.09 million troy ounces in October—the twelfth consecutive month of accumulation. Global central banks purchased 220 metric tons of gold in Q3, representing a 28% increase from Q2.

Yet precious metals faced headwinds from the surging dollar and fading December rate-cut odds. Since posting record peaks in mid-October, long liquidation has pressured prices, with ETF holdings in both gold and silver declining from 3-year highs set on October 21. The key tension: will safe-haven demand and geopolitical uncertainty overcome the headwind from higher US real rates?

What Traders Should Watch

The market’s transformation from expecting multiple rate cuts to pricing in no cuts is seismic. The 42-percentage-point swing in December rate-cut probability represents a major repricing event. For currency traders, USD strength may persist if the Fed truly adopts a hold pattern. For precious metals investors, the outcome hinges on whether policy divergence and central bank buying can offset the gravitational pull of a stronger dollar and higher US rates.