The US dollar strengthened modestly on Friday, supported by rising Treasury yields and renewed weakness in major peers, even as longer-term monetary policy expectations continue to weigh on the greenback.
The dollar index (DXY) rose 0.15%, with gains driven largely by declines in the euro and Japanese yen, both of which fell to 1.5-week lows against the dollar. Higher US Treasury yields reinforced the dollar’s interest-rate advantage, although strong equity markets reduced safe-haven demand and capped upside momentum.
Yields lift the dollar as rate-cut bets remain limited
US data offered little surprise, with the December S&P manufacturing PMI left unrevised at 51.8, in line with expectations. Interest-rate markets are currently pricing only a 15% probability of a 25 basis point rate cut at the Federal Reserve’s January 27–28 meeting, limiting near-term downside pressure on the dollar.
That said, underlying structural weakness remains. Markets expect the FOMC to cut rates by around 50 basis points in 2026, while the Bank of Japan is seen raising rates by a further 25 basis points and the European Central Bank is expected to keep policy steady. These diverging paths reduce the dollar’s longer-term yield appeal.
Additional pressure stems from the Fed’s renewed liquidity expansion. Since mid-December, the central bank has been purchasing $40 billion per month in Treasury bills, increasing system liquidity and weighing on the dollar. Investor sentiment has also been shaped by speculation that President Trump may appoint a dovish Fed Chair in early 2026. Bloomberg has reported that National Economic Council Director Kevin Hassett is viewed by markets as the most dovish leading candidate.
Euro slips on weak data and liquidity signals
EUR/USD fell 0.22% on Friday, hitting a 1.5-week low as broad dollar strength combined with soft eurozone fundamentals. The December S&P manufacturing PMI for the euro area was revised down by 0.4 points to 48.4, underscoring continued contraction in the industrial sector.
Meanwhile, November M3 money supply growth accelerated to 3.0% year-on-year, exceeding expectations of 2.7% and marking the strongest reading in four months. The increase reinforced perceptions of loose financial conditions. Interest-rate swaps are pricing a 0% chance of a 25 basis point ECB rate hike at the February 5 policy meeting.
Yen weakens as yields rise and liquidity thins
USD/JPY rose 0.08%, with the yen also sliding to a 1.5-week low. Higher US Treasury yields undermined the low-yielding Japanese currency, while trading volumes were subdued as Japanese markets were closed for a New Year holiday. Markets are assigning a 0% probability to a BOJ rate hike at the January 23 meeting.
Precious metals mixed amid dollar strength and policy support
Gold and silver finished Friday’s session mixed. February COMEX gold fell 0.26%, while March COMEX silver gained 0.58%. Dollar strength and higher global bond yields weighed on precious metals, while sentiment was further pressured by the CME’s decision to raise margin requirements on metals for the second time in a week, forcing some investors to reduce positions.
Despite near-term headwinds, broader support remains in place. Safe-haven demand continues amid uncertainty over US tariffs and ongoing geopolitical risks in Ukraine, the Middle East and Venezuela. Expectations of easier Fed policy in 2026, increased financial-system liquidity and strong central bank buying are also underpinning prices.
China’s PBOC increased gold reserves by 30,000 ounces in November to 74.1 million troy ounces, marking the thirteenth consecutive monthly increase. Separately, the World Gold Council reported that global central banks purchased 220 metric tons of gold in the third quarter, up 28% from the previous quarter.
Investor demand remains robust, with gold ETF holdings climbing to a 3.25-year high and silver ETF holdings reaching a 3.5-year high earlier this week, reinforcing the medium-term bullish backdrop for precious metals despite short-term volatility.
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