Stronger USD Driven by Hawkish Fed Stance and Better-Than-Expected Jobs Data

The dollar index surged to its highest point in six weeks on Thursday, closing with a +0.26% gain, fueled by a combination of resilient labor market signals and restrictive monetary policy signals from Fed officials.

Why the Dollar Extended Gains Thursday

US economic reports came in hotter than anticipated. Weekly jobless claims fell unexpectedly by 9,000 to reach a 6-week low of 198,000, compared to forecasts predicting a rise to 215,000. The January Empire State manufacturing survey jumped +11.4 points to 7.7, blowing past expectations of 1.0. The Philadelphia Fed’s January business outlook gauge surged +21.4 points to 12.6, a four-month peak that significantly exceeded the forecast of -1.4.

Beyond data strength, hawkish commentary from Federal Reserve policymakers anchored the dollar’s upside. Atlanta Fed President Raphael Bostic stated the central bank must maintain restrictive policy, citing his view that inflation pressures will persist through 2026. Kansas City Fed President Jeff Schmid echoed this sentiment, noting his preference to “keep monetary policy modestly restrictive” given ongoing inflation concerns.

The Dollar’s Structural Headwinds

Despite Thursday’s rally, the dollar faces headwinds looking ahead. Markets are pricing in approximately 50 basis points of Fed rate cuts throughout 2026, while the Bank of Japan is expected to add 25 basis points and the European Central Bank is likely to hold rates steady. This interest rate divergence typically supports currencies with higher yields elsewhere, pressuring the dollar.

The Fed’s expanded liquidity program—$40 billion monthly in Treasury bill purchases initiated in December—adds downward pressure on the currency. Additionally, speculation that President Trump may appoint a more dovish Fed Chair candidate (with Kevin Hassett frequently cited by Bloomberg as the likely choice) introduces longer-term dollar weakness concerns.

Ripple Effects Across Major Pairs

EUR/USD retreated to a 6-week low with a -0.27% decline. Although eurozone industrial production surprised positively at +0.7% month-over-month (versus +0.5% expected), the dollar’s strength overwhelmed this supportive data.

USD/JPY edged up +0.06% as a stronger dollar pressured the yen. Japan’s December producer prices increased just +2.4% year-over-year (down from +2.7% in November), marking the slowest pace in 20 months—a dovish signal for Bank of Japan policy. However, reports that Japanese Prime Minister Takaichi may dissolve parliament on January 23 and call snap elections for early February created uncertainty. Her expansionary fiscal stance could persist if the ruling LDP secures a majority, keeping inflation expectations elevated and limiting yen support. Geopolitical tensions between Japan and China—stemming from Beijing’s export controls on items with potential military applications—added another headwind to the currency.

Precious Metals: Mixed Signals on Growth and Inflation

February COMEX gold closed down 0.26% (-12.00), while March COMEX silver finished up 1.05% (+0.962), setting a fresh contract high.

The dollar’s 6-week climb pressured gold prices, as stronger currencies typically reduce precious metals’ appeal to international buyers. Easing geopolitical tensions around Iran—following Trump’s reported assurances that the country would curb protester killings—reduced safe-haven demand, further weighing on the complex.

However, multiple tailwinds kept silver better supported and prevented a steeper gold decline. The robust US jobs data and positive manufacturing surveys reinforced growth expectations, bolstering industrial metals demand. Central bank accumulation remained a key driver: China’s People’s Bank added 30,000 ounces to reserves in December, bringing holdings to 74.15 million troy ounces for the fourteenth consecutive month of increases. Global central banks purchased 220 metric tons of gold in Q3, up 28% from Q2.

Gold and silver ETF positions also climbed to multi-year highs, with gold long positions hitting a 3.25-year peak and silver reaching a 3.5-year high, signaling sustained institutional interest in precious metals as inflation hedges and store-of-value assets.

Structural Support for Precious Metals

Concerns over Federal Reserve independence—sparked by the Justice Department’s threats to indict the institution—have paradoxically boosted precious metals as non-traditional reserve assets. Trump’s recent directive for Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds (quasi-quantitative easing) further supported the appeal of hard assets.

With geopolitical risks still simmering across Iran, Ukraine, the Middle East, and Venezuela, combined with tariff uncertainty and expectations of easier Fed policy in 2026, precious metals retain structural support as long-term portfolio diversifiers.