US Economic Strength Propels Dollar to 4-Week Peak, Shaking Precious Metals Market

Dollar Index Surges on Robust Labor Market and Productivity Gains

The Dollar Index climbed to its highest point in four weeks, posting a +0.24% gain on Thursday as fresh US economic data exceeded market expectations. The catalyst? A surprisingly resilient labor market combined with productivity improvements that sparked fresh hawkish sentiment around Federal Reserve policy.

December job cuts plummeted to a 17-month low at 35,553, representing an -8.3% year-over-year decline—a clear sign of labor market strength. Weekly initial jobless claims came in at 208,000, rising only +8,000 against forecasts of 212,000. This restraint suggests employers are holding onto workers despite economic uncertainty.

On the productivity front, Q3 non-farm productivity expanded by +4.9%, matching expectations of +5.0% and marking the largest gain in two years. Meanwhile, unit labor costs contracted by -1.9%—a significantly steeper drop than the anticipated -0.1%—signaling improving corporate margins and potential price stability.

The trade deficit narrative also flipped bullish. October’s trade gap shrank unexpectedly to -$29.4 billion, crushing estimates of a widening to -$58.7 billion. This represents the smallest deficit in 16 years, reinforcing dollar support from an improving external balance.

Currency Pairs React: Euro Weakens, Yen Under Pressure

EUR/USD tumbled to a 4-week low, finishing down -0.21% as Thursday’s dollar strength overwhelmed modest euro-positive signals. December Eurozone economic confidence unexpectedly deteriorated, declining -0.4 to 96.7, below the forecasted 97.1 uptick. Producer price deflation accelerated—November PPI fell -1.7% year-over-year, the steepest decline in 13 months—suggesting disinflationary pressures that may soften ECB resolve.

Yet euro losses remained capped after surprising labor strength emerged: the November unemployment rate fell unexpectedly to 6.3% from 6.4%, defying expectations of stability. German factory orders also rebounded, posting a +5.6% monthly surge—the strongest in 11 months—after forecasts predicted a -1.0% contraction.

USD/JPY edged higher by +0.14% as the yen capitulated on multiple fronts. Japanese consumer confidence slumped in December while November real cash earnings disappointed, both suggesting a more dovish Bank of Japan stance. Escalating China-Japan geopolitical tensions added downside pressure, with Beijing announcing military-focused export controls targeting Tokyo in retaliation for rhetoric about potential Taiwan conflict scenarios. Higher US Treasury yields further squeezed the yen as carry traders reassessed positioning.

Precious Metals Bloodshed: Gold and Silver Post Twin Losses

February COMEX gold declined -1.80 (-0.04%), while March COMEX silver plunged -2.469 (-3.18%) as the dollar’s 4-week rally triggered aggressive long liquidation across the precious metals complex. Strategic commodity index reweighting added fuel to the selloff—Citigroup estimates roughly $6.8 billion in outflows from gold futures contracts and comparable silver selling pressures tied to BCOM and S&P GCSI index rebalancing.

Rising Treasury yields compounded the damage, making non-yielding assets less competitive in portfolio construction. However, safe-haven undertones persisted. Geopolitical turmoil spanning Ukraine, the Middle East, and Venezuela, combined with uncertainty around incoming US tariffs, continues to anchor baseline demand for precious metals.

Central bank accumulation remained a stabilizing force. China’s PBOC added +30,000 troy ounces to reserves in December, reaching 74.15 million ounces—the fourteenth consecutive monthly increase. Globally, central banks purchased 220 MT of gold in Q3, up +28% from Q2, underpinning structural support.

On the fund side, long positions in gold ETFs climbed to a 3.25-year high last Tuesday, while silver ETF holdings reached a 3.5-year peak on December 23, suggesting institutional conviction remains intact despite near-term price pressure.

Forward Guidance: Rate Cut Odds and Fed Chair Speculation Loom

Market pricing now assigns just a 12% probability to a -25 basis point rate cut at the January 27-28 FOMC meeting, reflecting confidence in current Fed resolve. Yet longer-term headwinds persist. Swaps show zero chance of a +25 basis point ECB hike at February 5’s policy gathering, while the BOJ carries zero odds of a January 23 rate increase.

The wild card: Trump’s rumored dovish Fed Chair replacement. Bloomberg reports National Economic Council Director Kevin Hassett tops the candidate list, perceived by markets as the most accommodative pick. An appointment would signal a policy pivot toward monetary ease in 2026, introducing structural dollar weakness and supporting gold’s appeal as monetary insurance. Combined with the Fed’s ongoing $40 billion monthly T-bill purchases launched in mid-December, liquidity injections are bolstering precious metals demand as portfolio ballast.

The dollar’s 4-week rally may prove transient—macro conditions suggest a 2026 landscape where the Fed eases, the ECB holds, and the BOJ tightens, structurally favoring alternative assets over the greenback.