Dollar Strengthens as Fed Rate-Cut Expectations Plunge; Precious Metals Sink

The greenback extends gains today following President Trump’s nomination of Kevin Warsh as the next Federal Reserve Chair, triggering a significant market repricing. The dollar index (DXY) climbs +0.53% as investors absorb the implications of a potentially more hawkish Fed leadership, which signals that interest rate cuts—a key driver of dollar weakness—may plunge to historically low probability levels. Precious metals experience a sharp sell-off, with February COMEX gold down -5.35% and March COMEX silver plummeting -13.16% as liquidation pressures sweep through commodity markets.

Warsh Nomination Reshapes Rate-Cut Narrative

Kevin Warsh brings a distinctly hawkish policy orientation to the Fed Chair conversation, a profile that immediately impacts market expectations. During his tenure as a Federal Reserve Governor from 2006 to 2011, Warsh consistently emphasized inflation risks over growth concerns, positioning him as less favorable toward aggressive rate-cutting cycles. This policy framework contrasts sharply with market speculation about deeper rate cuts in 2026, triggering the sharp retreat in rate-cut odds that investors are pricing into currency and commodity markets today.

Market pricing now reflects a mere 16% probability of a -25 basis point rate cut at the March 17-18 policy meeting. Looking ahead to 2026, swaps are discounting approximately -50 basis points of total easing from the Fed—a material cut from previous expectations that had priced in more aggressive monetary accommodation. This dovish shift by market expectations stands in sharp contrast to expected tightening by other major central banks, creating powerful tailwinds for the greenback.

Economic Data Reinforces Dollar Strength

Today’s US economic releases provide additional support for the greenback’s advance. December producer prices surge past expectations, with final demand PPI rising +0.5% month-over-month (vs. +0.2% expected) and +3.0% year-over-year (vs. +2.8% expected). Core PPI excluding food and energy paints an even more hawkish picture, climbing +0.7% m/m against +0.2% anticipated, and +3.3% y/y versus +2.9% forecast.

The Chicago PMI expansion provides another powerful indicator of economic momentum. January’s MNI Chicago Purchasing Managers Index surges to 54.0, crushing forecasts of 43.7 and marking the strongest pace of expansion in more than two years. These figures underscore an economy operating with considerable vigor—a backdrop that undermines the case for aggressive policy easing and supports Fed officials who take a more restrictive stance on future rate cuts.

Contributing to dollar momentum, President Trump announced late Thursday that a tentative agreement has been reached with Senate Democrats to avert a government shutdown. The deal funds the Department of Homeland Security for two additional weeks while allowing more time for immigration policy negotiations and provides full-year funding for numerous other federal agencies. This development reduces near-term fiscal uncertainty and supports USD positioning.

Fed Communications Remain Mixed

Not all messaging from the Federal Reserve points in a hawkish direction. Fed Governor Christopher Waller offered dovish commentary today, stating that “monetary policy is still restricting economic activity, and economic data make it clear to me further easing is needed.” Such statements remind markets that the Fed itself remains divided on the pace of future rate cuts, though the nomination of a more hawkish chair appears to have shifted market consensus toward a slower easing trajectory.

The political backdrop also influences market sentiment. President Trump’s comfort with recent dollar weakness, expressed late Tuesday, initially supported currency depreciation. However, this commentary appears to be fading as market participants reassess policy direction under a potentially more hawkish Fed leadership structure.

Currency Markets Reflect Policy Divergence

EUR/USD trades lower by -0.64% as the stronger dollar reflects both US rate-cut expectations plunging and Fed leadership shifting toward inflation vigilance. Despite supportive Eurozone economic data—including an unexpected drop in the unemployment rate to a record low 6.2%, stable inflation expectations at 2.8%, and slightly stronger-than-expected GDP growth at +0.3% quarterly—the euro cannot keep pace with the dollar’s advance.

The ECB faces minimal rate-cut pressure, with swap markets pricing virtually zero probability of a +25 basis point hike at the February 5 policy meeting. German inflation data remains stable, with January CPI rising +2.1% year-over-year, reinforcing a hold bias from Frankfurt policymakers.

USD/JPY climbs +1.01% as the yen faces multiple headwinds. December retail sales in Japan decline by -2.0% month-over-month—the largest drop in 5.5 years—providing evidence of domestic economic softness. Simultaneously, January Tokyo CPI rises at the slowest pace in 3.75 years at just +1.5% year-over-year, well below December’s +1.7% expectation. Such dovish data signals reinforce expectations that the Bank of Japan will maintain its accommodative stance, with markets pricing zero probability of a rate hike at the March 19 meeting.

December industrial production in Japan retreats -0.1% m/m against expectations of -0.4%, offering minimal support. This pattern of soft economic indicators contrasts sharply with US momentum, pushing USD/JPY higher as interest rate differentials widen between the two economies.

Precious Metals Plunge on Policy Fears

Gold and silver prices experience a dramatic repricing, with February COMEX gold plunging to one-week lows down -5.35%, while March COMEX silver crashes -13.16% to post a one-week low. The primary catalyst centers on investor fears that a more hawkish Fed Chair will resist the aggressive rate cuts that have supported precious metals’ recent strength.

Gold reached an all-time high of $5,586.20 per ounce on Thursday, and silver achieved a new record high of $120.07 per troy ounce before today’s sharp reversal. The Warsh nomination immediately triggered massive liquidation in long precious metals positions as traders rapidly repriced their inflation-and-rate-cut-driven thesis.

The shutdown avoidance deal also weighs on metals, reducing the safe-haven bid that had supported prices during period of fiscal uncertainty and political turbulence. With near-term government funding resolved, some of the urgency to own assets perceived as protection against fiscal dysfunction diminishes.

Underlying Support Remains Anchored

Despite today’s plunge, structural factors continue to support precious metals valuations over the longer term. Geopolitical tensions across Iran, Ukraine, the Middle East, and Venezuela maintain safe-haven demand flows. Additionally, the dollar debasement trade gains momentum as investors become increasingly concerned about large US budget deficits, mounting fiscal profligacy, and widening political polarization.

Central bank demand for gold shows remarkable resilience. China’s People’s Bank of China expanded its gold reserves by +30,000 ounces to reach 74.15 million troy ounces in December, marking the fourteenth consecutive month of reserve accumulation. The World Gold Council recently reported that global central banks purchased 220 metric tonnes of gold in Q3, up +28% from Q2, demonstrating sustained institutional demand at elevated price levels.

Fund demand for precious metals remains strong despite today’s volatility. Gold ETF long positions climbed to a 3.5-year high on Wednesday, while silver ETF long positions reached their highest level since December 23. This suggests that many institutional managers view the current market dislocation as a buying opportunity rather than a trend reversal, potentially limiting downside on any extended period of weakness.