Yen Depreciation Fuels Dollar Rally Amid Dovish Fed Signals

The dollar strengthened today, gaining +0.06% on the Dollar Index (DXY), as the yen continued to face headwinds from mounting concerns over Japan’s massive fiscal stimulus. The Japanese government’s newly approved 17.7 trillion yen ($112 billion) stimulus package—significantly larger than last year’s 13.9 trillion yen initiative—has intensified pressure on the yen, which now hovers just above its 10-month low. This dynamic underscores the ongoing tension between fiscal expansion and currency stability in Japan’s economy.

Fed Policy Expectations Limit Dollar Upside Despite Yen Weakness

While the dollar benefited from yen weakness, upward momentum was constrained by dovish rhetoric from Fed Governor Christopher Waller, who signaled support for a December rate cut at the upcoming FOMC meeting on December 9-10. Market pricing reflects this sentiment, with traders assigning a 70% probability to a 25 basis point reduction in the fed funds target range. Waller emphasized concerns about labor market conditions and indicated a more cautious, meeting-by-meeting approach starting in January, further tempering dollar strength.

Additional headwinds emerged from today’s equity market rally, which reduced safe-haven demand for the dollar. Simultaneously, Treasury note yields declined, which limited further depreciation pressure on the yen despite the structural challenges facing Japan’s debt burden.

Euro Edges Higher on Ukraine Peace Optimism

EUR/USD rose +0.08% today, buoyed by comments from NATO Secretary General Rutte regarding prospects for ending the war in Ukraine. Rutte stated confidence that a peace agreement could materialize, noting that Russia faces unfavorable battlefield conditions and mounting losses of approximately 20,000 troops monthly.

However, these gains faced resistance from unexpectedly weak German economic data. Germany’s November IFO business climate index fell 0.4 points to 88.1, disappointing forecasts for an increase to 88.5 and signaling softer business sentiment. Meanwhile, swap markets are pricing in only a 2% probability of a rate cut from the ECB at its December 18 policy meeting, suggesting limited near-term policy accommodation from the eurozone.

Dollar-Yen Dynamics Reflect Japan’s Fiscal-Monetary Imbalance

USD/JPY surged +0.38%, with the yen bearing the full weight of Japan’s accumulating debt concerns. The currency remains vulnerable despite today’s decline in Treasury yields, reflecting structural vulnerabilities stemming from aggressive fiscal stimulus amid demographic headwinds. Trading volumes remained subdued with Japanese markets closed for the Labor Thanksgiving Day holiday. Market participants are currently pricing a 23% probability of a BOJ rate hike at December 19’s policy meeting.

Precious Metals Rebound on Dovish Fed Rhetoric

December COMEX gold advanced +8.70 points (+0.21%), while December COMEX silver climbed +0.097 (+0.19%), as Waller’s accommodative comments rekindled precious metals’ appeal as inflation hedges and store-of-value assets.

The recovery in gold and silver prices occurred despite initial losses as stocks rallied—typically capping safe-haven demand. However, multiple structural factors continue supporting the metals complex. Central banks have emerged as relentless buyers, with China’s PBOC expanding reserves to 74.09 million troy ounces in October, marking the twelfth consecutive month of accumulation. The World Gold Council reported global central banks purchased 220 metric tons of gold in Q3, a 28% increase from Q2, underscoring sustained institutional demand.

Countervailing headwinds include easing geopolitical tensions following Ukraine peace developments and recent long liquidation pressures that have weighed on prices since the metals posted mid-October record highs. Gold and silver ETF holdings, while still elevated, have declined from their October 21 peak despite remaining at three-year levels. Uncertainty surrounding U.S. tariff policies and potential political pressure on Federal Reserve independence continue to provide underlying safe-haven support for precious metals valuations.