Dollar Treads Water as Euro and Yen Face Their Own Headwinds

The dollar index managed a modest climb of +0.05% on Thursday, but the journey wasn’t smooth. What started as weakness turned into a quiet recovery, with the currency finding its footing as EUR/USD slipped lower. The moves reflected a market caught between conflicting signals: data suggesting the Federal Reserve might hold back on rate cuts clashing with persistent concerns about policy tightening ahead.

The Dollar’s Mixed Signals

Early in the session, the dollar stumbled when U.S. economic data disappointed on inflation fronts. November’s consumer price index came in at +2.7% year-over-year, falling short of the +3.1% forecast, while core CPI rose just +2.6% year-over-year—the slowest pace in 4.5 years. The Philadelphia Federal Reserve’s December business outlook survey also surprised to the downside, plunging to -10.2 from expectations of a +2.3 advance.

However, Thursday brought one bright spot: weekly jobless claims declined by 13,000 to 224,000, landing near the 225,000 expectation. This helped stabilize the dollar after its early tumble.

Yet headwinds persist. The Fed’s massive liquidity injection—$40 billion monthly in Treasury bill purchases—continues to weigh on dollar demand. More concerning for greenback bulls: speculation that President Trump will name a dovish Federal Reserve Chair in early 2026, with Kevin Hasselt emerging as the market’s expected choice. Such a development would likely pressure the dollar further, as markets currently price in only a 27% probability of a Fed rate cut by the January 27-28 FOMC meeting.

Euro Retreats Despite ECB Steadiness

The euro fell -0.14% on Thursday despite the European Central Bank keeping rates unchanged as anticipated. The ECB even raised its 2025 Eurozone GDP forecast to 1.4% from 1.2%, and ECB President Lagarde struck a hawkish tone, describing the Eurozone economy as “resilient.”

None of this could prop up the euro. Instead, two headwinds overwhelmed sentiment: Bloomberg reported that ECB officials expect rate cuts to be largely complete, and Germany announced plans to increase federal debt sales by nearly 20%—reaching a record 512 billion euros ($601 billion) to fund expanded government spending. Fiscal concerns in the eurozone continue to weigh heavily.

The ECB maintained its deposit facility rate at 2.00% and kept 2025 inflation forecasts (excluding food and energy) at 2.4%. Market pricing suggests just a 1% chance of a -25 basis point cut at the February 5 policy meeting.

Yen Strengthened by Rate Hike Expectations

The yen posted a -0.08% decline against the dollar on Thursday, but the move masked underlying strength. The Japanese currency rallied on multiple fronts: dollar weakness, falling U.S. Treasury yields, and—most importantly—anticipation that the Bank of Japan will raise rates by 25 basis points at Friday’s policy decision. Markets are pricing in a 96% probability of that hike materializing.

Japanese fiscal concerns provide some offset, however. Reports emerged that Tokyo is considering a record budget exceeding 120 trillion yen ($775 billion) for fiscal 2026, which could eventually weigh on the yen if investors fear future currency weakness from budget pressures.

Precious Metals Caught Between Bulls and Bears

Gold finished lower on Thursday, dropping -9.40 points (-0.21%), while silver fell more sharply, closing down -1.682 (-2.51%). The culprit: a broad-based stock market rally that sapped safe-haven demand.

Hawkish central bank commentary also pressured bullion. Beyond Lagarde’s resilience comments, Bank of England Governor Bailey signaled the bar for future rate cuts has risen, while BOJ rate-hike expectations for Friday weighed on precious metals more generally.

Yet precious metals aren’t without support. The BOE’s 25 basis point rate cut on Thursday boosted demand for gold and silver as stores of value. Weaker-than-expected U.S. inflation data remains dovish for Fed policy, a tailwind for bullion. Geopolitical risks tied to Ukraine, the Middle East, Venezuela, and uncertainty over Trump-era tariffs continue to anchor safe-haven demand.

Central bank demand remains a cornerstone. China’s People’s Bank boosted gold reserves by 30,000 ounces to 74.1 million troy ounces in November—the 13th consecutive month of accumulation. The World Gold Council reported global central banks purchased 220 metric tons in Q3, a 28% jump from Q2.

Silver gets additional support from tight Chinese inventories. Shanghai Futures Exchange warehouse silver stocks plummeted to 519,000 kilograms on November 21—a 10-year low.

While ETF long positions hit 3-year highs in mid-October before recent liquidation pressures mounted, silver ETF holdings have rebounded to near 3.5-year highs this week, suggesting institutional interest remains intact even amid volatility.