Dollar Soars to Biggest Daily Gain since May amid Sharp Decline in Metal Prices

The U.S. dollar saw its biggest one-day rally since May, as the greenback benefitted from a steep drop in precious metal prices and the surprise nomination of Kevin Warsh to lead the U.S. Federal Reserve. 

The surge, while significant, could not completely offset the dollar's broader losses, as it ended January down approximately 1.3%, marking its worst monthly performance since August.

On Wednesday, the Bloomberg Dollar Spot Index gained as much as 0.9%, recovering across the board against major currencies, including the euro, yen, and British pound. 

US Dollars gains against currencies:

USD/EUR +1.01%

USD/JPY +1.09%

USD/GBP +0.90%

USD/CHF +1.14%

USD/AUD +1.23%

USD/HKD +0.11%

USD/TRY +0.13%

USD/SGD +0.45%

USD/RUB +1.05%

USD/CAD +0.91%

USD/AED 0.00%

USD/SAR +0.00%

USD/QAR +0.03%

USD/KWD +0.06%

USD/JOD +0.03%

USD/EGP +0.22%

USD/BHD −0.01%

However, despite this bounce, January’s overall performance was negative, underscoring the dollar’s ongoing struggles amid heightened political tensions and global economic uncertainties.

The sharp rally in the dollar was propelled by a significant retreat in both gold and silver prices. The dramatic fall in the prices of these metals put pressure on currencies closely tied to commodity markets, such as the Australian dollar, Swiss franc, and Swedish krona, which saw notable declines.

Gold, which had recently experienced a period of steady gains, registered its largest drop since the early 1980s, while silver prices plummeted to a historic low. This decline in precious metals, coupled with Trump's announcement to nominate Warsh to head the Federal Reserve, gave the dollar a boost as investors reacted positively to the prospect of more aggressive monetary tightening.

“Markets are still nervous overall. The bets on a depreciating dollar have been put on hold for now, but that doesn’t mean the dollar’s decline is over,” said Kathleen Brooks, Director of Research at XTB.

The catalyst for the dollar’s upward momentum came after U.S. President Donald Trump nominated Kevin Warsh for the role of Federal Reserve Chairman. Warsh, who is seen as more hawkish on inflation than current Chairman Jerome Powell, is expected to take a tougher stance on rising prices, which has bolstered expectations of a more aggressive tightening of U.S. monetary policy. This prospect has strengthened the dollar as investors anticipate higher interest rates in the U.S.

Warsh’s nomination is perceived as a signal that the Fed might implement more restrictive measures to combat inflation, potentially reducing the liquidity that has fueled global growth in recent years. As a result, traders are betting on a more dollar-positive environment, which could provide support to the greenback in the near term.

While the dollar surged, currencies sensitive to the prices of precious metals were among the hardest hit. The Australian dollar, Swiss franc, and Swedish krona, all of which are closely linked to commodities, fell significantly against the greenback. 

Despite the dollar’s recovery on Wednesday, the broader market remains volatile, and the outlook for the currency remains uncertain. As global inflationary pressures persist and geopolitical risks continue to simmer, the U.S. dollar faces an uphill battle in maintaining its upward momentum.

“Even though the dollar has gained significantly in recent days, the market remains uncertain. Geopolitical tensions, political instability, and commodity price fluctuations continue to weigh on investor sentiment,” added Brooks.