Year-End Market Volatility: Currency Weakness and Precious Metals Correction Amid Liquidation Pressures

Currency Markets Face Mixed Signals as Rate Expectations Shift

The dollar’s momentum remains fragile as traders navigate conflicting economic signals. While the DXY Index gained modestly on Monday, the underlying trend suggests ongoing depreciation concerns. The stronger-than-anticipated November pending home sales data—rising 3.3% month-over-month versus 0.9% expectations—initially supported the currency. However, this bounce proved short-lived after the Dallas Fed’s December manufacturing survey showed unexpected weakness, with the business activity gauge sliding to -10.9, significantly below the -6.0 projection.

The real pressure on the dollar stems from forward-looking rate differentials. Market participants are pricing just a 16% probability of a -25 basis point cut at the January 27-28 FOMC meeting, yet expect roughly -50 basis points of easing throughout 2026. Simultaneously, the BOJ is anticipated to raise rates by approximately +25 basis points next year, while the ECB is forecasted to maintain current levels. This convergence of policy directions creates a challenging environment for dollar bulls. Adding to bearish sentiment, the Fed’s $40 billion monthly T-bill purchases beginning in mid-December are injecting substantial liquidity, typically a headwind for the currency.

Perhaps most significantly, speculation about a dovish replacement for Fed Chair Powell is creating uncertainty. Bloomberg reports that Kevin Hassett, the National Economic Council Director, emerges as the frontrunner candidate—widely perceived as accommodation-focused and potentially bearish for currency valuations.

The Yen Strengthens While the Euro Faces Headwinds

USD/JPY experienced a -0.35% decline on Monday as the BOJ’s December 19 policy summary indicated several officials view Japan’s real interest rate as accommodative, signaling potential future tightening. Despite markets pricing zero probability of a January 23 rate hike, the mere suggestion of future increases provided support for the Japanese currency. Declining US Treasury yields reinforced this dynamic, amplifying yen appreciation pressure.

For EUR/USD, the picture grew darker with a -0.03% retreat. Eurozone bond yields compressed further—the 10-year German bund reached a three-week low of 2.824%—as stalled peace negotiations between Russia and Ukraine disappointed market optimists. ECB rate expectations remain anchored at zero percent chance of a +25 basis point move at the February 5 meeting, effectively removing any yield attraction for euro investors.

Precious Metals Capitulate Under Liquidation Wave

February COMEX gold contracted sharply by -209.10 points (-4.59%), while March silver collapsed -6.736 (-8.73%), marking multi-week lows for both commodities. The rout accelerated when CME margin requirements increased, forcing mechanical liquidations across long positions and triggering capitulation selling.

The BOJ’s policy signals proved particularly damaging, as markets recalibrated expectations around higher rates and potentially stronger yen holdings (relevant for understanding the 10 million yen to USD context—currency strength affects commodity pricing through cross-rate dynamics). Silver’s retreat from the record $81.85 per troy ounce level underscored the severity of the pullback.

Structural Support Remains Intact Despite Near-Term Weakness

Despite Monday’s dramatic selloff, underpinnings for precious metals persist. Central bank buying remains robust: China’s PBOC expanded reserves by +30,000 ounces to 74.1 million troy ounces in November—marking the thirteenth consecutive month of accumulation. Global central banks collectively purchased 220 metric tons in Q3, representing +28% growth from Q2 activity.

ETF positioning similarly reflects underlying interest, with gold long holdings climbing to 3.25-year highs Friday, and silver long positions reaching 3.5-year peaks the prior Tuesday. Geopolitical risks—particularly US military actions in Nigeria, the Venezuela sanctions regime, and Ukrainian conflicts—continue anchoring safe-haven demand.

The fundamental case for precious metals also rests on Fed easing expectations in 2026, combined with the December liquidity injection announcement and potential appointment of a dovish central bank chair—all factors supporting the transition toward easier financial conditions and reduced real rates.