Dollar Retreats as Fed Policy Eases, EUR/USD Slips on Eurozone Concerns

The dollar index staged a modest recovery on Thursday, gaining just +0.05% despite facing significant headwinds from softer-than-expected US economic data and shifting Fed policy expectations.

Soft Economic Data Triggers Dollar Weakness Initially

Thursday morning brought a pair of disappointing reports that initially sent the dollar lower. US November CPI came in at +2.7% year-over-year, missing the forecast of +3.1%. Core CPI, excluding volatile food and energy prices, hit +2.6%—weaker than the expected +3.0% and marking the slowest pace in 4.5 years. The December Philadelphia Fed business outlook survey deteriorated sharply to -10.2 from the previous reading, when markets had expected an improvement to 2.3.

These softer numbers fueled speculation that the Federal Reserve may maintain its easing bias into 2026, weighing on the dollar’s safe-haven appeal.

Jobless Claims Stabilize, But Broader Pressures Remain

A bright spot came when US weekly initial unemployment claims declined by 13,000 to 224,000, nearly aligned with expectations of 225,000. The labor market showed resilience, yet this couldn’t offset the dovish signals from inflation and business sentiment data.

Markets are currently pricing in a 27% probability that the FOMC will cut the federal funds rate by 25 basis points at its January 27-28 meeting, reflecting caution about the near-term economic outlook.

EUR/USD Under Pressure on Fiscal Concerns and Rate-Cut Outlook

The euro took a step back on Thursday, with EUR/USD falling -0.14% as diverging monetary policy signals and fiscal worries weighed on the currency pair. While the ECB held rates steady as anticipated and upgraded its 2025 Eurozone GDP forecast to 1.4% from 1.2%, officials subsequently signaled that interest rate cuts may be largely complete in this cycle.

The ECB left its deposit facility rate unchanged at 2.00%, and ECB President Christine Lagarde described the Eurozone economy as “resilient”—remarks that initially supported EUR/USD but proved insufficient to overcome other headwinds.

Fiscal pressures mounted after Germany announced plans to raise federal debt sales by nearly 20% next year to a record 512 billion euros ($601 billion), signaling fiscal strain that has become a persistent drag on eurozone sentiment.

Yen Gains on BOJ Rate-Hike Expectations

USD/JPY declined -0.08% as the yen strengthened amid dollar weakness and lower US Treasury yields, which reduce the yield advantage of dollar-denominated assets. Markets are pricing in a 96% probability that the Bank of Japan will raise rates by 25 basis points at Friday’s policy meeting, providing structural support to the yen.

However, Japanese fiscal pressures—with the government reportedly considering a record budget exceeding 120 trillion yen ($775 billion) for fiscal 2026—have capped gains in the currency.

Precious Metals Pressured by Hawkish Central Bank Comments

Precious metals retreated on Thursday as equity market strength reduced their allure as safe-haven assets. February COMEX gold closed down -9.40 (-0.21%), while March COMEX silver fell -1.682 (-2.51%).

Hawkish comments from central bankers, including ECB President Lagarde and Bank of England Governor Bailey noting that the bar for further rate cuts has risen, dampened demand for gold and silver as assets that benefit from easier monetary conditions.

Yet underlying support remained robust. Central bank buying continued to underpin gold prices—China’s PBOC expanded reserves by 30,000 troy ounces in November to 74.1 million troy ounces, marking the thirteenth consecutive month of accumulation. Global central banks purchased 220 metric tons of gold in Q3, up 28% from Q2, according to the World Gold Council.

Silver found support from tight inventories, with Shanghai Futures Exchange warehouse holdings falling to 519,000 kilograms on November 21—the lowest level in a decade. After retreating from mid-October record highs, silver ETF holdings rebounded to nearly a 3.5-year high on Tuesday, signaling renewed demand.

Trump’s Fed Chair Signaling Creates Longer-Term Uncertainty

A layer of uncertainty continues to weigh on the dollar outlook: President Trump signaled he will announce his choice for the next Federal Reserve Chair in early 2026. Market analysis suggests National Economic Council Director Kevin Hassett is the leading candidate, perceived as significantly more accommodative toward monetary easing than current leadership. This prospect of dovish Fed stewardship has kept dollar strength constrained and supported asset prices sensitive to lower real yields.

The Bottom Line

Thursday’s market action reflected the ongoing tension between soft economic data favoring rate cuts and central bank commentary attempting to maintain policy discipline. The dollar’s inability to hold onto gains despite the jobless claims beat underscores how thoroughly Fed easing expectations have permeated market pricing—and how uncertain the dollar’s trajectory remains into 2026.