The dollar index (DXY00) on Tuesday fell by -0.21%. The dollar moved lower on Tuesday amid strength in the Chinese yuan, which rose to a 2.5-year high against the dollar. Losses in the dollar accelerated on Tuesday after higher T-note yields erased early gains and turned lower, weakening the dollar’s interest rate differentials.
Losses in the dollar were contained on Tuesday after the stock sell-off boosted liquidity demand for the dollar. Also, slightly hawkish comments from Richmond Fed President Tom Barkin were supportive of the dollar when he said the US economic outlook is improving and that inflation is still running above the Fed’s goal.
The dollar still has carryover support from last Friday when President Trump nominated Keven Warsh as the next Fed Chair. Mr. Warsh is seen as more hawkish than other Fed Chair candidates and often emphasized inflation risks during his tenure as a Fed Governor from 2006-2011.
The partial US government shutdown entered its fourth day on Tuesday, a negative factor for the dollar. However, the shutdown is expected to be brief, as the House may vote on the spending bill later Tuesday. Late last Thursday, President Trump said that he reached a tentative deal with Senate Democrats to avert a US government shutdown. The deal would fund the Homeland Security Department for two weeks to allow more time for talks on immigration enforcement and contains full-year funding for several other government agencies.
Richmond Fed President Tom Barkin said today that the US economic outlook is improving as uncertainty fades, but risks remain, with hiring concentrated in a few sectors and inflation still running above the Fed’s goal.
The dollar sank to a 4-year low last Tuesday when President Trump said he’s comfortable with the recent weakness in the dollar. Also, the dollar remains under pressure as foreign investors pull capital from the US amid a growing budget deficit, fiscal profligacy, and widening political polarization.
The markets are discounting the odds at 9% for a -25 bp rate cut at the next policy meeting on March 17-18.
The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -50 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026.
EUR/USD (^EURUSD) on Tuesday rose by +0.20%. The euro moved higher on Tuesday due to a weaker dollar. Gains in the euro were limited after the French Jan CPI came in weaker than expected, a dovish factor for ECB policy.
The French Jan CPI (EU harmonized) fell -0.4% m/m and rose +0.4% y/y, weaker than expectations of -0.2% m/m and +0.6% y/y.
Swaps are discounting a 1% chance of a +25 bp rate hike by the ECB at Thursday’s policy meeting.
USD/JPY (^USDJPY) on Tuesday rose by +0.10%. The yen added to Monday’s losses today and fell to a fresh 1-week low against the dollar. The yen is also under pressure after a Kyodo News poll released today showed Japan’s ruling Liberal Democratic Party is set to win a majority in Sunday’s lower house election, deepening fiscal concerns. The yen recovered most of its losses on Tuesday after T-note yields fell from early highs and turned lower, sparking short covering in the yen.
The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on March 19.
April COMEX gold (GCJ26) on Tuesday closed up +282.40 (+6.07%), and March COMEX silver (SIH26) closed up +6.292 (+8.17%).
Gold and silver prices rallied sharply on Tuesday, recovering some of the sharp declines seen over the past two sessions. Tuesday’s weaker dollar is supportive of metals.
Precious metals are also supported by safe-haven demand amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela. Also, precious metals are surging as the dollar debasement trade gathers steam. Last Tuesday, President Trump said that he’s comfortable with the recent weakness in the dollar, which sparked demand for metals as a store of value. In addition, US political uncertainty, large US deficits, and uncertainty regarding government policies are prompting investors to cut holdings of dollar assets and shift into precious metals.
Precious metals also have support as the partial US government shutdown extends to a fourth day on Tuesday. However, the shutdown may be short-lived, with the House expected to vote on a spending plan to reopen the government later on Tuesday. President Trump said last Thursday that he reached a tentative deal with Senate Democrats to avert a US government shutdown.
Finally, increased liquidity in the financial system is boosting demand for precious metals as a store of value, following the FOMC’s December 10 announcement of a $40 billion-per-month liquidity injection into the US financial system.
Precious metals sold off last Friday and Monday after President Trump announced he had nominated Keven Warsh as the new Fed Chair, which fueled massive liquidation of long positions in precious metals. Mr. Warsh is one of the more hawkish candidates for Fed Chair and is seen as less supportive of deep interest rate cuts.
Strong central bank demand for gold is supportive of prices, following the recent news that bullion held in China’s PBOC reserves rose by +30,000 ounces to 74.15 million troy ounces in December, the fourteenth consecutive month the PBOC has boosted its gold reserves. Also, the World Gold Council recently reported that global central banks purchased 220 MT of gold in Q3, up +28% from Q2.
Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.5-year high last Wednesday. Also, long holdings in silver ETFs rose to a 3.5-year high on December 23, though liquidation has since knocked them down to a 2.5-month low on Monday.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
