Softer US Labor Market and Manufacturing Slowdown Trigger Sharp Dollar Reversal

Economic weakness across employment, retail, and manufacturing sectors has triggered a notable dollar decline, with the dollar index retreating to a 2.25-month low and closing down -0.21% on Tuesday. The dollar sign symbol of weakness appears across multiple indicators: November nonfarm payrolls expanded by only +64,000 (beating expectations of +50,000), while October’s revision showed a significant miss at -105,000 against expectations of -25,000. The unemployment rate climbed +0.1 percentage points to 4.6%, marking a 4-year high—a clear shift from labor market tightness that previously supported the dollar.

Wage growth, a traditional dollar bullish indicator, has decelerated sharply. November average hourly earnings rose just +0.1% month-on-month and +3.5% year-on-year, both missing forecasts of +0.3% and +3.6% respectively. Critically, the year-on-year gain represents the smallest increase in 4.5 years, signaling cooling inflationary pressures that weigh on dollar demand.

Beyond labor data, broader economic momentum has deteriorated. October retail sales stagnated month-on-month (missing expectations of +0.1% growth), though ex-autos posted a modest +0.4% gain. December’s S&P manufacturing PMI fell to 51.8, down -0.4 points to a 5-month low and weaker than the expected 52.1 reading. This trio of disappointing data points has sparked aggressive market repricing of Federal Reserve policy expectations.

Fed Policy Pivot and Geopolitical Uncertainty Amplify Dollar Losses

Market expectations for further rate cuts have crystallized, with swaps pricing in a 24% probability of a 25 basis point cut at the January 27-28 FOMC meeting. This hawkish-to-dovish shift in Fed rate expectations has been compounded by uncertainty surrounding the next Fed Chair appointment. President Trump has signaled he will announce his selection for the leadership position in early 2026, with Bloomberg reporting that National Economic Council Director Kevin Hassett is viewed as the most likely successor and perceived as the most dovish candidate.

Simultaneously, the Federal Reserve initiated a liquidity provision program effective last Friday, purchasing $40 billion monthly in Treasury bills. This combination—expectations of sustained rate easing into 2026 paired with dovish Fed leadership prospects—has created structural headwinds for dollar valuations.

Euro Gains Despite Mixed Eurozone Signals

EUR/USD surged to a 2.5-month high, finishing up +0.02%, bolstered by broad dollar weakness. However, eurozone-specific data sent conflicting signals. December’s S&P manufacturing PMI unexpectedly contracted to 49.2, down -0.4 points and marking the steepest decline in 8 months. Yet Germany’s ZEW economic sentiment index rose sharply by +7.3 to 45.8, the highest in 5 months and significantly above the expected 38.4 decline.

The euro’s resilience reflects divergent monetary policy trajectories: while the Fed is expected to maintain its rate-cutting bias through 2026, the ECB is widely perceived to have concluded its rate-cutting cycle. Market pricing shows zero probability of an additional 25 basis point cut at Thursday’s ECB policy meeting. This policy divergence creates structural demand for euro assets relative to dollar-denominated alternatives.

Yen Strengthens on BOJ Rate Hike Prospects and US Weakness

USD/JPY declined -0.37% as the yen rallied to a 1-week high against the dollar. Japan’s December S&P manufacturing PMI surged to 49.7, up +1.0 point to a 6-month peak. More importantly, market participants are heavily discounting a BOJ rate increase, with swaps pricing in a 96% probability of a 25 basis point hike at Friday’s policy decision.

The combination of weak US economic data, expectations of imminent Japanese tightening, and a now-lower dollar naturally supports yen strength. This divergence—with the BOJ poised to tighten while the Fed continues easing—has created a widening interest rate differential favoring yen appreciation.

Precious Metals Navigate Cross-Currents: Rate Cuts vs. BOJ Tightening

February COMEX gold finished down -2.90 (-0.07%), while March silver closed down -0.266 (-0.42%). Despite dollar weakness typically supporting precious metals, prices retreated as inflation expectations weakened. The 10-year breakeven inflation rate dropped to a 2-week low, reducing demand for gold as an inflation hedge. Industrial metals faced additional pressure from the sharp manufacturing slowdown in both the US and Eurozone, signaling reduced industrial demand.

However, precious metals retain substantial structural support. Central bank accumulation continues its robust trajectory: China’s PBOC expanded gold reserves by +30,000 ounces to 74.1 million troy ounces in November, marking thirteen consecutive months of reserve expansion. Global central banks purchased 220 metric tons of gold during Q3, a +28% increase from Q2 levels.

Silver inventories have tightened considerably, with Shanghai Futures Exchange-linked warehouse holdings falling to 519,000 kilograms on November 21, the lowest in a decade. While ETF holdings declined from October’s 3-year highs, silver ETF long positions rebounded to nearly 3.5-year highs on Monday, signaling renewed fund demand.

Geopolitical risk premiums—encompassing US tariff uncertainties and conflicts in Ukraine, the Middle East, and Venezuela—continue providing safe-haven bid. Additionally, prospects for extended Fed monetary accommodation in 2026 under dovish leadership support long-term precious metals demand as portfolio insurance against currency debasement and financial system stress.