Markets in Flux: the Dollar Dominates while Euro and Yen Retreat Ahead of US Data

US Dollar at Monthly Highs Thanks to Positive Economic Surprises from the United States

The latest movement in the currency markets tells a fascinating story of economic divergence. The US dollar reached four-week highs on Thursday with a performance of 0.24%, driven by a series of American indicators that exceeded expectations. This dynamic reflects market reactions to a labor market more resilient than expected.

Challenger job cut announcements showed an 8.3% year-over-year decrease, stopping at 35,553 units—the lowest in nearly eighteen months. Meanwhile, weekly unemployment benefit claims increased by only 8,000 units, reaching 208,000, well below the 212,000 forecast by analysts. These numbers paint a picture of a substantially stable employment market.

Third-quarter productivity accelerated to 4.9%, nearly in line with the forecasted 5.0%, representing the most significant jump in twenty-four months. Even more notably, unit labor costs contracted by 1.9%, a substantial decline compared to the 0.1% decrease expected by experts. On the trade front, the October deficit drastically shrank to $29.4 billion—an unexpectedly positive result compared to the forecasted expansion to $58.7 billion and the narrowest gap since 2009.

However, behind these upward pushes, markets continue to price in scenarios of medium-term monetary easing. The probability of a 25 basis point rate cut at the Federal Reserve’s late-January meeting remains modest at 12%, while expectations for 2026 see the Fed reducing rates by about 50 basis points overall. This contrast between current strong data and normalization prospects creates tension in the markets.

Recent liquidity injections from the Federal Reserve—with $40 billion in Treasury securities purchased monthly since mid-December—are already influencing the 2026 outlooks. There is growing speculation that President Trump will appoint a Fed chief with an expansionary stance. Kevin Hassett, current director of the National Economic Council, is considered the leading candidate and would be a decision favoring more accommodative monetary policy according to market consensus.

Euro Under Pressure: Confidence Falls and Weak Outlooks

The euro-dollar pair experienced a shake on Thursday, falling to four-week lows with a loss of 0.21%. The euro was simultaneously hit by the strength of the dollar and disappointing data indicating increasing economic fragility in the eurozone.

The Eurozone economic confidence index for December unexpectedly fell by 0.4 points to 96.7, whereas projections suggested a move toward 97.1. This deterioration is accompanied by a sharp decline in November producer prices—down 1.7% year-over-year, representing the deepest contraction in thirteen months. These signals converge to suggest a scenario where the European Central Bank will need to maintain an accommodative stance.

Not all data were negative. Unemployment in the eurozone for November unexpectedly fell by 0.1 percentage points to 6.3%, contradicting expectations of stability. German factory orders showed strength with a monthly increase of 5.6%—well above the 1% decline anticipated and the best result in eleven months. The ECB’s annual inflation expectations remained at 2.8%, just above the expected 2.7%.

ECB Vice President Luis de Guindos stated that current interest rates remain appropriate, confirming that overall inflation is at 2%, with services showing moderation. Markets do not foresee any probability of a 25 basis point rate hike at the February 5 meeting. This stance remains crucial in keeping the Japanese yen and other emerging currencies under relative pressure.

Japanese Yen Weakens Due to a Cocktail of Adverse Factors

The US dollar gained 0.14% against the yen on Thursday, continuing a trend of yen depreciation reflecting both internal dynamics and geopolitical factors. Japanese December economic data missed expectations, with consumer confidence contracting and real wages underperforming—both factors strengthening the case for the Bank of Japan to maintain an accommodative monetary policy.

Rising US Treasury yields further depressed the yen, creating rate differentials that attract carry trades toward the dollar. Simultaneously, geopolitical tensions between China and Japan added turbulence. Beijing implemented export controls on materials with potential military applications destined for Japan, in response to Japanese Prime Minister’s statements about possible military implications in the event of an invasion of Taiwan. These trade embargoes pose significant risks to supply chains and the Japanese economy.

Japan’s fiscal outlook worsens the situation further. Prime Minister Takaichi’s administration approved a budget of 122.3 trillion yen (roughly $780 billion) with a historic increase in defense spending. Markets assign zero probability to any rate hike by the Bank of Japan at the January 23 meeting.

Gold and Silver Decline: Strong Dollar Weighs on Safe-Haven Metals

February COMEX gold futures closed down $1.80 (with a negative change of 0.04%), while March silver futures suffered a larger loss of $2.469 (-3.18%) on Thursday. This marks the second consecutive day of declines for both precious metals, mainly attributable to the dollar index’s surge to four-week highs, which triggered liquidation of long positions accumulated in the market.

An additional pressure factor comes from concerns about rebalancing commodity indices. Citigroup estimates that adjustments to the BCOM and S&P GSCI panels will result in outflows of about $6.8 billion each from gold and silver futures markets. Rising US bond yields have amplified these pressures, creating an unfavorable environment for yieldless assets like precious metals.

Despite this technical deterioration, precious metals maintain strong fundamental supports. Demand for protective instruments remains robust amid ongoing uncertainty over US tariffs and geopolitical risks in Ukraine, the Middle East, and Venezuela. Expectations of a more expansionary Federal Reserve policy in 2026, especially if a dovish president is appointed, continue to support appetite for gold and silver as stores of value.

Fed liquidity injections are increasing the appeal of metals as a hedge of purchasing power. Central bank demand remains solid: China’s central bank increased its gold reserves by 30,000 ounces in December, reaching 74.15 million ounces—marking the fourteenth consecutive month of accumulation. The World Gold Council documented that central banks globally acquired 220 metric tons of gold in the third quarter, a 28% increase from the previous quarter.

Investor interest in precious metals continues to grow. Gold ETF holdings reached their highest in 3.25 years last Tuesday, while silver ETFs hit their highest in 3.5 years on December 23. These capital inflow levels indicate that operators still see value in precious metals as strategic diversification, despite short-term pressures from the strong dollar.