Fed Optimism Propels Dollar to Weekly Peak as Yen Sign Shows Mixed Signals in Currency Markets

The greenback surged to fresh 1-week highs today, gaining +0.18% on the dollar index, as optimistic remarks from New York Federal Reserve President John Williams bolstered risk appetite and lent support to the US currency. Williams noted that recent economic data appears “pretty encouraging” with no alarming signs of labor market deterioration, a commentary that temporarily shored up the dollar’s position against major peers.

However, the rally proved fleeting. A disappointing revision to December consumer sentiment—which unexpectedly fell -0.4 points to 52.9—triggered a pullback in dollar strength. Additionally, renewed strength in equities across global markets limited the currency’s upside, as investors rotated risk-on, reducing safe-haven demand for the greenback.

The Fed’s latest liquidity injection—now purchasing $40 billion monthly in Treasury bills—has further pressured dollar valuations from a macro perspective. Markets remain cautious about potential monetary policy shifts, with swaps pricing just a 20% probability of a January rate cut by the FOMC at its late-month gathering.

Yen Sign Shows Weakness Despite BOJ Rate Increase

The Japanese yen sign displayed pronounced fragility today despite the Bank of Japan’s anticipated 25 basis point rate hike to 0.75%. USD/JPY advanced sharply by +1.20%, pushing the yen to 4-week lows against the dollar.

BOJ Governor Ueda’s cautious messaging on future hikes—signaling a data-dependent, gradual approach to normalization—undermined yen support. His comment that headline inflation may dip below 2% in H1 next year suggested limited urgency for aggressive tightening, prompting traders to fade the yen sign in currency markets despite the immediate policy action.

Japanese government bond yields jumped to 26-year peaks at 2.025%, yet this failed to provide meaningful yen support. Fiscal concerns loom large after reports emerged of a record 120+ trillion yen budget proposal for fiscal 2026, adding weight to the yen’s decline.

Euro Under Pressure from Weak Data and Fiscal Headwinds

EUR/USD retreated to 1-week lows, falling -0.04% as disappointing Eurozone economic releases fueled dovish expectations for ECB policy. German producer prices contracted -2.3% year-on-year in November, undershooting forecasts of -2.2% and marking the steepest pace in 20 months.

The January GfK consumer confidence survey added to bearish pressures, collapsing -3.5 points to -26.9, a 1.75-year trough well below the anticipated -23.0 reading. Separately, Germany’s announcement of a 20% increase in federal debt issuance to a record €512 billion ($601 billion) underscored deteriorating fiscal dynamics across the bloc.

Market pricing reflects minimal ECB rate cut odds at the February 5 policy meeting, with swaps showing 0% probability of a 25 basis point reduction.

Gold and Silver Rally on Dovish Fed Expectations

Precious metals staged a notable advance today, with February COMEX gold climbing +10.90 (+0.25%) and March COMEX silver surging +1.311 (+2.01%). The rally was underpinned by weaker-than-expected US economic data reinforcing recession concerns and reducing faith in the Fed’s higher-for-longer stance.

Last week’s core CPI report demonstrated price growth at its slowest pace in 4.5 years, while today’s downward sentiment revision amplified the bullish case for metals as investors reassess the Fed’s 2026 trajectory. Talk of President Trump appointing a dovish Fed Chair has intensified speculation about an extended easing cycle, a classic supportive factor for gold and silver demand.

Geopolitical uncertainty—spanning tariff concerns and flashpoint tensions across Ukraine, the Middle East, and Venezuela—provided safe-haven bid for precious metals. Strong central bank accumulation added fundamental support: China’s PBOC reserves rose by 30,000 ounces to 74.1 million troy ounces in November, marking the thirteenth consecutive month of purchases. Global central banks collectively acquired 220 MT of gold in Q3, up 28% sequentially.

Silver found additional support in concerns over tight Chinese inventory levels, with Shanghai Futures Exchange warehouse holdings hitting 519,000 kilograms—a 10-year low.

However, near-term headwinds persisted. The dollar’s week-high reduced precious metals’ appeal in non-USD currency terms, while elevated global bond yields competed for investor capital. The BOJ’s rate hike dampened metals-as-store-of-value demand. Hawkish remarks from Fed President Williams—downplaying urgent need for further cuts—capped gains, though sentiment recovered as market participants reassessed 2026 monetary policy expectations and digested long liquidation pressures from the recent ETF peak on October 21.