The dollar index (DXY00) on Monday fell by -0.27%. Threats to Fed independence hammered the dollar on Monday after Fed Chair Powell said the Justice Department’s threat of criminal charges against the Federal Reserve over his June testimony on Fed headquarters renovations is the consequence of the Fed not going along with President Trump’s calls for lower interest rates.
On Sunday, Fed Chair Powell said the Fed had been served grand jury subpoenas from the Justice Department threatening a criminal indictment related to his June congressional testimony on ongoing renovations of the Fed’s headquarters. Powell said, “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than the preferences of the president.”
The markets are discounting the odds at 5% for a -25 bp rate cut at the FOMC’s next meeting on January 27-28.
The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -50 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026.
The dollar is also under pressure as the Fed boosts liquidity in the financial system, having begun purchasing $40 billion a month in T-bills in mid-December. The dollar is also being undercut by concerns that President Trump intends to appoint a dovish Fed Chair, which would be bearish for the dollar. Mr. Trump recently said that he will announce his selection for the new Fed Chair in early 2026. Bloomberg reported that National Economic Council Director Kevin Hassett is the most likely choice as the next Fed Chair, seen by markets as the most dovish candidate.
EUR/USD (^EURUSD) on Monday rose by +0.29%. Threats to the Fed’s independence undercut the dollar on Monday and boosted the euro. The euro also found support in Monday’s report showing the Eurozone Jan Sentix investor confidence index rose more than expected to a 6-month high.
The Eurozone Jan Sentix investor confidence index rose by +4.4 to a 6-month high of -1.8, stronger than expectations of -5.0.
Swaps are pricing in a 1% chance of a +25 bp rate hike by the ECB at the next policy meeting on February 5.
USD/JPY (^USDJPY) on Monday rose by +0.15%. The yen tumbled to a 1-year low against the dollar on Monday after the Yomiuri newspaper reported that Japanese Prime Minister Takaichi may dissolve the lower house of parliament at the start of the next parliamentary session on January 23 and call a snap election on February 8 or February 15. Markets are concerned that Takaichi’s expansionary fiscal policy will persist and that the long-term inflation outlook will rise if the ruling LDP party secures a majority in a snap election. Higher T-note yields on Monday also weighed on the yen.
Losses in the yen were limited on Monday as the dollar fell amid threats to the Fed’s independence. Trading activity in the yen is well below normal, as Japanese markets were closed on Monday for the Coming-of-Age Day holiday.
The yen is also being undercut by an escalation of China-Japan tensions, following China’s announcement last week of export controls on items destined for Japan that could have military uses in retaliation for comments made by Japan’s prime minister about a potential conflict if China invaded Taiwan. The export controls could worsen supply chains and negatively affect Japan’s economy.
The markets are discounting a 0% chance of a BOJ rate hike at the next meeting on January 23.
February COMEX gold (GCG26) on Monday closed up +113.80 (+2.53%), and March COMEX silver (SIH26) closed up +5.750 (+7.25%).
Gold and silver prices rallied sharply on Monday, with Feb gold and Mar silver posting contract highs. Also, nearest-futures Jan gold (GCF26) rose to a record high of $4,620 an ounce and Jan silver (SIF26) soared to a record nearest-futures high of $85.83 a troy ounce.
Concerns about the Fed’s independence boosted demand for precious metals as a safe haven on Monday, following the US Justice Department’s threat to indict the Federal Reserve. Fed Chair Powell said the potential indictment comes amid “threats and ongoing pressure” by the Trump administration to influence interest rate decisions.
Precious metals also have support after President Trump last Friday directed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds in an attempt to lower borrowing costs and spur housing demand. The bond-buying move is seen as quasi-quantitative easing, boosting demand for precious metals as a store of value.
Precious metals have ongoing support amid safe-haven demand amid uncertainty over US tariffs and geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela. Also, precious metals are supported by concerns that the Fed will pursue an easier monetary policy in 2026 as President Trump intends to appoint a dovish Fed Chair. In addition, increased liquidity in the financial system is boosting demand for precious metals as a store of value, following the FOMC’s December 10 announcement of a $40 billion-per-month liquidity injection into the US financial system.
Strong central bank demand for gold is supportive of prices, following last Wednesday’s news that bullion held in China’s PBOC reserves rose by +30,000 ounces to 74.15 million troy ounces in December, the fourteenth consecutive month the PBOC has boosted its gold reserves. Also, the World Gold Council recently reported that global central banks purchased 220 MT of gold in Q3, up +28% from Q2.
Fund demand for precious metals remains strong, with long holdings in gold ETFs climbing to a 3.25-year high last Thursday. Also, long holdings in silver ETFs rose to a 3.5-year high on December 23.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
