The dollar index declined 0.27% on Monday as threats to Federal Reserve independence weighed on the currency. Fed Chair Jerome Powell stated Sunday that the Justice Department has served grand jury subpoenas threatening criminal indictment related to his June congressional testimony about Fed headquarters renovations.
Powell said, "The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than the preferences of the president." This followed his comments that the Justice Department's actions resulted from the Fed not complying with President Trump's calls for lower interest rates.
Markets currently price a 5% chance of a 25 basis point rate cut at the FOMC's January 27-28 meeting. The dollar shows underlying weakness with expectations for approximately 50 basis points of Fed rate cuts in 2026, while the Bank of Japan is anticipated to raise rates by 25 basis points and the European Central Bank likely to maintain current levels.
Additional pressure on the dollar comes from the Fed's liquidity measures, including $40 billion monthly Treasury bill purchases that began in mid-December. Concerns about President Trump potentially appointing a dovish Fed Chair in early 2026 also undermine the currency. Bloomberg reports National Economic Council Director Kevin Hassett appears the most likely candidate, viewed by markets as the most dovish option.
The euro gained 0.29% against the dollar on Monday, supported by threats to Fed independence and a stronger-than-expected Eurozone Sentix investor confidence index reading of -1.8 for January, reaching a six-month high. Swaps indicate a 1% probability of a 25 basis point ECB rate hike at the February 5 policy meeting.
USD/JPY rose 0.15% as the yen fell to a one-year low following reports that Japanese Prime Minister Takaichi may dissolve parliament's lower house on January 23 and call a snap election in February. Markets worry about persistent expansionary fiscal policy and rising inflation if the ruling LDP secures majority control. Higher Treasury note yields further pressured the yen.
Yen losses were limited by dollar weakness from Fed independence concerns. Trading activity remained subdued with Japanese markets closed for Coming-of-Age Day. China-Japan tensions escalated after China announced export controls on military-use items bound for Japan, potentially worsening supply chains and affecting Japan's economy. Markets see zero chance of a BOJ rate hike at the January 23 meeting.
February COMEX gold closed up $113.80 (2.53%) and March COMEX silver rose $5.750 (7.25%) on Monday. Both metals reached contract highs, with January gold hitting a record $4,620 per ounce and January silver reaching $85.83 per troy ounce.
Safe-haven demand for precious metals increased amid concerns about Fed independence following the Justice Department's indictment threat. Powell described the situation as involving "threats and ongoing pressure" from the Trump administration regarding interest rate decisions.
Precious metals found additional support after President Trump directed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds last Friday, a move viewed as quasi-quantitative easing that boosts demand for value stores. Ongoing geopolitical risks in Iran, Ukraine, the Middle East, and Venezuela, along with uncertainty about US tariffs, continue supporting safe-haven assets.
Central bank activity provides further support, with China's PBOC increasing gold reserves by 30,000 ounces in December to 74.15 million troy ounces—the fourteenth consecutive monthly rise. The World Gold Council reported global central banks purchased 220 metric tons of gold in Q3, up 28% from Q2.
Fund demand remains strong, with gold ETF long holdings reaching a 3.25-year high last Thursday and silver ETF long positions hitting a 3.5-year high on December 23.