Dollar Strengthens as Yen Tumbles, Mixed Signals Shape Central Bank Policy Outlook

Dollar Reaches Weekly Peak Amid Volatility

The dollar index climbed to a 1-week high Friday, finishing the session up +0.19%, buoyed by weakness in the Japanese yen. However, the greenback’s trajectory remained complicated as conflicting signals emerged from economic data and policy commentary. The dollar faced headwinds from equity market strength and the Federal Reserve’s ongoing liquidity injection program, which involves purchasing $40 billion monthly in Treasury bills since last Friday. Additionally, market concerns about a potential dovish Fed leadership appointment weighed on the currency. President Trump indicated he would announce his new Federal Reserve Chair selection in early 2026, with Bloomberg reporting that National Economic Council Director Kevin Hassett—perceived as the most dovish candidate—leads the selection pool.

Fed Rhetoric Supports Near-Term Dollar Stability

New York Federal Reserve President John Williams delivered comments that provided temporary support to the dollar on Friday. Williams characterized recent economic data as “pretty encouraging” and noted no evidence of deterioration in employment figures. He projected US GDP growth of 1.5% to 1.75% this year with acceleration anticipated next year, signaling that current monetary policy adjustments have positioned the economy favorably. Williams emphasized there is “no urgency to need to act further on monetary policy right now,” given the impact of previous rate cuts. Market pricing reflects only a 22% probability of a 25 basis point rate cut at the January 27-28 Federal Open Market Committee meeting.

Consumer Sentiment Softens, Creating Downside Pressure

The dollar retreated from its session peaks following an unexpected downward revision to consumer sentiment data. The University of Michigan’s December consumer sentiment index was unexpectedly revised lower by -0.4 points to 52.9, falling short of expectations for an upward revision to 53.5. This softer-than-anticipated sentiment reading bolstered expectations for additional Federal Reserve rate cuts, which typically weighs on dollar valuations. Meanwhile, US November existing home sales rose +0.5% month-over-month to a 9-month high of 4.13 million units, though this came slightly below the 4.15 million expected. In a concerning development, the University of Michigan’s December 1-year inflation expectations were unexpectedly revised upward to 4.2% from the previously reported 4.1%.

Euro Slides on Eurozone Economic Weakness and Fiscal Concerns

The EUR/USD currency pair fell to a 1-week low Friday, closing down -0.01%. Weaker-than-expected Eurozone economic indicators drove euro weakness early in the session. German November producer prices fell -2.3% year-over-year, exceeding expectations for a -2.2% decline and marking the steepest pace of decrease in 20 months. The German January GfK consumer confidence index posted an unexpected drop of -3.5 points to a 1.75-year low of -26.9, substantially weaker than expectations for an increase to -23.0.

Fiscal policy developments also pressured the euro after Germany announced plans to boost federal debt sales by nearly 20% next year to a record 512 billion euros ($601 billion) to fund increased government spending. However, the euro recovered most early-session losses following hawkish commentary from ECB Governing Council member Pierre Wunsch. Wunsch indicated the European Central Bank can maintain monetary policy steady if economic conditions evolve as anticipated. Market pricing shows zero probability of a 25 basis point rate cut by the ECB at the February 5 policy meeting, with swaps pricing suggesting rates will remain on hold.

Yen Weakness Dominates Despite BOJ Rate Hike

USD/JPY surged +1.29% Friday as the Japanese yen tumbled to a 4-week low against the dollar. The yen’s weakness proved resilient despite the Bank of Japan raising its overnight call rate by 25 basis points to 0.75%, with all nine BOJ governors voting in favor of the increase. BOJ Governor Ueda tempered hawkish expectations by signaling caution regarding further rate hikes. Ueda stated he sees headline inflation below 2% in the first half of next year and that “the pace at which we adjust our rate will depend on the state of the economy and prices.”

The yen’s decline persisted even as Japanese government bond yields surged dramatically. The 10-year JGB yield jumped to a 26-year high of 2.025%, normally a supportive factor for the currency. Fiscal policy concerns undermined demand, as Kyodo News reported the Japanese government is contemplating a record budget exceeding 120 trillion yen ($775 billion) for fiscal 2026. Japan’s November national consumer price index rose +2.9% year-over-year, meeting expectations precisely. The core measure, excluding fresh food and energy, also rose +3.0% year-over-year, matching forecasts. Market pricing reflects zero probability of a BOJ rate hike at the January 23 policy meeting.

Precious Metals Rally on Dovish Policy Expectations

February COMEX gold closed up +22.80 (+0.52%) Friday, while March COMEX silver surged +2.270 (+3.48%), with March silver posting a contract high. Nearest-futures silver reached an all-time high of $66.85 per troy ounce, reflecting broad precious metals strength. Weaker-than-anticipated US economic data bolstered expectations for additional Federal Reserve rate cuts, providing fundamental support. Thursday’s core consumer price index report revealed price growth had decelerated to the slowest pace in 4.5 years, reinforcing the dovish narrative.

Precious metals received additional support from safe-haven demand amid uncertainty surrounding US tariff policy and geopolitical tensions spanning Ukraine, the Middle East, and Venezuela. Concerns that President Trump will appoint a dovish Federal Reserve Chair to steer monetary policy toward greater accommodation in 2026 further underpinned prices. Chinese central bank demand for gold remained constructive, with November data showing China’s People’s Bank of Gold reserves increased by +30,000 ounces to 74.1 million troy ounces—the thirteenth consecutive month of reserve accumulation. The World Gold Council reported that global central banks purchased 220 metric tons of gold in the third quarter, up +28% sequentially.

Silver Benefits from Inventory Tightness and Fund Interest

Silver benefited from supply concerns tied to tight Chinese inventories. Silver stockpiles in warehouses linked to the Shanghai Futures Exchange fell to 519,000 kilograms on November 21, marking the lowest level in 10 years. While long liquidation pressures have weighed on precious metals prices since their mid-October record highs, as evidenced by ETF holdings declining after reaching 3-year peaks on October 21, fund demand for silver has rebounded. Long holdings in silver ETFs rose to a nearly 3.5-year high on Tuesday, suggesting renewed institutional interest.

Headwinds Limiting Upside Momentum

Despite supportive fundamentals, precious metals faced offsetting headwinds Friday. Dollar strength, as reflected in the dollar index reaching a 1-week high, typically pressures metal prices. Higher global bond yields also weighed on valuations as investors reassess return expectations across asset classes. The BOJ’s rate increase of 25 basis points further curbed demand for precious metals as inflation hedges and stores of value, given the relative yield advantage shifting toward yen-denominated assets.