Dollar Gains Traction on Strong US Data, But Fed Policy Uncertainty Caps Upside

2026-01-12 17:32:22

The dollar index (DXY) climbed +0.09% today, lifted by stronger-than-expected US economic data and elevated Treasury yields. However, recent political noise around Fed Chair Powell’s job security is tempering bullish momentum.

Economic Data Delivers, But Powell Uncertainty Lingers

The US October S&P CaseShiller composite-20 home price index posted a +0.3% month-over-month rise and +1.3% year-over-year gain, both outpacing forecasts of +0.1% m/m and +1.1% y/y. More impressively, the December Chicago PMI surged to 43.5—a +9.2 point jump that crushed expectations of 40.0. These data points should normally drive dollar strength, and they did provide initial support today.

Higher Treasury note yields also reinforced the greenback’s interest rate appeal. Yet the momentum couldn’t sustain. President Trump’s Monday evening comment that he “still might” fire Fed Chair Powell created enough doubt to limit dollar gains. Markets now price only a 16% probability of a -25 basis point rate cut at the January 27-28 FOMC meeting—still a hawkish signal, but one undermined by appointment uncertainty.

The Structural Headwinds: Rate Cuts vs. Rate Hikes

Looking ahead to 2026, the market’s rate expectations paint a bearish picture for the dollar. The FOMC is forecast to cut rates by approximately -50 basis points next year, while the BOJ is preparing another +25 basis point hike and the ECB is expected to hold steady. This divergence favors higher-yielding currencies and pressures the greenback.

Adding to this weakness, the Fed launched a $40 billion monthly Treasury bill purchase program in mid-December—a liquidity injection that signals accommodation and weighs on dollar sentiment. If Trump appoints a dovish Fed Chair (Bloomberg reports Kevin Hassett, seen as the most dovish candidate, is frontrunner for the role announced in early 2026), expect further dollar selling pressure.

Currency Pair Action: EUR/USD Down, USD/JPY Up

EUR/USD retreated -0.13% today as dollar strength temporarily overwhelmed other factors. However, euro losses were contained after Spain reported stronger-than-expected core CPI of +2.6% y/y versus +2.5% forecast—a hawkish signal that supports ECB policy continuity. The Russian-Ukrainian conflict’s lack of breakthrough over the weekend remains a drag on euro sentiment. Swaps price only a 1% odds of an ECB rate hike on February 5.

USD/JPY managed a +0.19% gain today despite the dollar’s mixed picture. Higher US yields drove the yen lower, though the Bank of Japan’s December 19 meeting provided some support—policymakers signaled Japan’s real rates remain very low, implying further BOJ hikes are likely ahead. Markets assign just 1% probability to a rate move at the January 23 BOJ meeting.

Precious Metals Seize the Opportunity

February COMEX gold (GCG26) surged +37.90 to +0.87%, while March COMEX silver (SIH26) jumped +4.510 or +6.40%. The metals’ sharp rally reflects multiple supportive factors:

Safe-haven demand spiked on Fed independence concerns after Trump’s Powell comments
Geopolitical support continues from US-Venezuela sanctions, ISIS operations in Nigeria, and Ukraine tensions
Central bank buying remains strong—China’s PBOC gold reserves rose +30,000 ounces to 74.1 million troy ounces in November (thirteenth consecutive month of purchases), and global central banks bought 220 MT of gold in Q3, up +28% from Q2
Fund positioning is bullish—gold ETF long holdings hit a 3.25-year high Monday; silver ETF longs reached 3.5-year high last Tuesday

The 43.5 Chicago PMI reading, though strong, reflects economic resilience that paradoxically supports precious metals when paired with Fed policy uncertainty and geopolitical risks. This combination makes gold and silver attractive portfolio hedges heading into 2026.

The Bottom Line

Today’s dollar gains on solid US data are real but fragile. The structural outlook remains challenging: expect -50bp of Fed cuts in 2026 while the BOJ and ECB diverge upward or hold. Political uncertainty around Fed leadership compounds the downside. For traders, this suggests dollar strength rallies offer opportunities to pare longs, while precious metals and higher-yielding currencies (on BOJ hike expectations) offer better tactical value into 2026.

This page may contain third-party content, which is provided for information purposes only (not representations/warranties) and should not be considered as an endorsement of its views by Gate, nor as financial or professional advice. See Disclaimer for details.