Fed's Dovish Pivot Drives Dollar Weakness to Multi-Week Lows

The dollar is facing mounting pressure today as a confluence of factors signal easier monetary policy ahead. The dollar index (DXY) slipped 0.24%, reflecting broad weakness in the greenback across major currency pairs.

Policy Signals Overshadow Economic Data

The primary catalyst stems from fresh dovish commentary from Fed Governor Stephen Miran, who stated that the Fed’s current policy stance is unnecessarily restrictive on the economy. This remark, combined with the Fed’s recent announcement to inject $40 billion monthly in T-bill purchases, has intensified expectations for rate cuts in 2026. Markets are currently pricing in a 27% probability of a 25 basis point cut at the January 27-28 FOMC meeting.

The December Empire manufacturing survey added fuel to the dovish narrative, unexpectedly contracting by 22.6 points to -3.9, significantly undershooting the anticipated 10.0 reading. This weak data point reinforced concerns about economic momentum, bolstering the case for policy easing.

Political Uncertainty Weighs on the Dollar’s Outlook

President Trump’s recent announcement that he will name a new Fed Chair in early 2026 has introduced an additional layer of uncertainty. Market participants are viewing Kevin Hassett, the National Economic Council Director, as the most probable candidate—and markets perceive him as the most dovish contender. This prospect of a more accommodative Fed leadership has pressured the dollar across major pairs.

EUR/USD Climbs on Divergent Central Bank Trajectories

The euro gained 0.23% to a 2.5-month peak against the dollar, buoyed by improving Eurozone data and widening policy divergence. October industrial production in the eurozone rose 0.8% month-over-month, marking the strongest reading in five months. With the ECB expected to conclude its rate-cutting cycle while the Fed continues easing, the euro found support. Swaps indicate zero probability of a 25 basis point cut from the ECB at this week’s meeting.

Yen Strengthens Amid BOJ Rate Hike Expectations

USD/JPY declined 0.60%, with the yen reaching a one-week high. The Bank of Japan’s upcoming policy decision Friday is a key driver, with markets pricing in a 95% probability of a 25 basis point rate increase. Japan’s Q4 Tankan large manufacturing outlook survey rose to 15—its highest level in seven years and above the 12 forecast—while October’s tertiary industry index surged 0.9% month-over-month, exceeding the 0.2% expectation.

Precious Metals Rally on Dollar Weakness and Safe-Haven Demand

Gold futures for February delivery surged 0.53% to gain $22.90, while March silver climbed 2.04% to add $1.263. The twin forces of a weaker dollar and lower Treasury yields provided tailwinds for both metals. Dovish Fed commentary reinforced precious metals’ appeal as inflation hedges and stores of value during periods of monetary accommodation.

China’s central bank continued its accumulation trend, with PBOC reserves climbing by 30,000 ounces to 74.1 million troy ounces in November—the thirteenth consecutive month of increases. Global central banks purchased 220 metric tons of gold in Q3, up 28% from the prior quarter, sustaining underlying demand.

However, Chinese economic weakness tempered silver’s rally. Beijing’s industrial production cooled unexpectedly to 4.8% year-over-year from 4.9% in October, while retail sales growth decelerated to just 1.3% year-over-year, the slowest pace in 2.75 years. New home prices extended their decline streak to 30 consecutive months, signaling persistent deflationary pressures.

On the technical front, silver inventories at Shanghai Futures Exchange-linked warehouses hit a decade low of 519,000 kilograms on November 21, providing support. Silver ETF holdings rebounded to nearly 3.5-year highs last Friday after experiencing long liquidation pressures from their October 21 peaks.

The Dollar’s Comparative Weakness

While the dollar index is showing weakness broadly, comparisons with other currencies like sterling and the pound reveal differentiated strength across major currency pairs. The dollar’s struggle reflects the market’s conviction that Fed easing will dominate 2026 policy trajectory, a stark reversal from previous expectations of sustained rate elevation.