Fed Chair Speculation Triggers Dollar Weakness and Safe-Haven Scramble

The dollar index faced headwinds on Wednesday, finishing down 0.08% as market participants reassessed their positioning following Bloomberg’s report that Kevin Hassett is emerging as a leading candidate to replace Jerome Powell as Federal Reserve Chair. Hassett’s dovish stance on interest rates has ignited significant implications across currency and commodity markets, reshaping how investors view the dollar’s medium-term outlook.

What’s Driving the Dollar’s Retreat?

While early Wednesday trading saw the dollar rally on better-than-expected US economic surprises—weekly jobless claims fell to a 7-month low of 216,000, and September capital goods orders rose 0.9% month-over-month versus expectations of just 0.3%—these gains quickly evaporated. The culprit was twofold: Chicago PMI data revealed a 17-month contraction low of 36.3, and the prospect of a dovish Fed Chair nomination weighed heavily on sentiment.

The Hassett nomination presents a structural concern for dollar bulls. Known for his alignment with President Trump’s preference for lower interest rates, Hassett’s appointment would signal potential pressure on Fed independence. Markets are currently pricing in an 80% probability of a 25 basis point rate cut at the December 9-10 FOMC meeting—a pricing that would likely intensify under a dovish Fed Chair with political ties.

Stock market strength on Wednesday further reduced safe-haven demand for the dollar, as equity rallies typically attract liquidity away from traditional currency carries.

Euro Capitalizes on Mixed Signals

EUR/USD climbed to a 1-week high, rising 0.23% on Wednesday, buoyed by comments from ECB Governing Council member Boris Vujcic suggesting that Eurozone interest rates are appropriately positioned “for the time being.” This measured dovishness from the ECB—combined with balanced views on growth and inflation risks—provides a stabilizing anchor for the euro.

However, uncertainty surrounding the Russian-Ukrainian peace negotiations continues to cap upside potential. The euro remains caught between supportive ECB rhetoric and geopolitical headwinds, with market pricing showing just a 1% chance of an ECB rate cut by December 18.

Japanese Yen Under Pressure from Stock Strength

USD/JPY advanced 0.24% on Wednesday, with the yen bearing the brunt of a 1.85% rally in the Nikkei Stock Index. As equities climb, investors shed safe-haven positions, pressuring the yen accordingly. Softer-than-expected PPI service price data at 2.7% year-over-year further reduced expectations for imminent BOJ tightening.

Yet the yen found some support from stronger-than-initially-reported economic indicators: Japan’s leading economic index climbed to an 11-month high of 108.6, and October machine tool orders surged 17.1% year-over-year—the strongest showing in more than three years. Reuters reported that the BOJ is preparing markets for a possible rate hike as early as December 19, though current market pricing reflects only a 34% probability.

Gold and Silver Rally on Dovish Fed Expectations

Safe-haven precious metals surged on Wednesday, with December COMEX gold closing up 0.61% and December COMEX silver jumping 3.83% to 1.5-week highs. The Hassett nomination catalyzed this rally, as market participants reassessed their inflation and currency debasement hedges.

With an 80% probability now priced into a December rate cut, demand for gold and silver as stores of value has intensified. The dovish Fed Chair narrative compounds this repricing, as investors increasingly view holding physical bullion as portfolio insurance against a lower-for-longer rate environment.

China’s central bank has emerged as a structural buyer of significant importance. Beijing’s gold reserves expanded to 74.09 million troy ounces in October, marking the twelfth consecutive month of reserve accumulation. Globally, central banks purchased 220 metric tons in Q3—a 28% increase from Q2—underscoring institutional conviction around gold’s role in a multipolar financial system.

Silver specifically benefits from tight physical supplies. Shanghai Futures Exchange warehouse inventories have collapsed to 10-year lows, creating potential supply-side pressures if demand accelerates further.

Headwinds Limiting Further Gains

Not all factors support higher precious metals prices. The Wednesday equity rally reduced immediate safe-haven demand, while reports of improved prospects for ending the Ukraine conflict have similarly curbed hedging flows into bullion.

On a technical level, precious metals have faced liquidation pressures since posting record highs in mid-October. Holdings in gold and silver ETFs have retreated from 3-year highs set on October 21, suggesting that some momentum players have already closed positions.

The Bigger Picture

Wednesday’s trading revealed a market in transition. The prospect of a dovish Fed Chair, combined with deteriorating manufacturing data, is challenging the narrative of interest rate stability that has supported the dollar throughout 2024. Meanwhile, central banks worldwide—particularly China’s People’s Bank—are doubling down on gold accumulation, suggesting they’re hedging against precisely the dollar weakness that Hassett’s nomination implies.

For traders watching the logo dollar and seeking exposure to this shift, the week ahead will be critical in determining whether these moves represent a lasting repricing or merely a temporary correction before the December FOMC decision clarifies the Fed’s true path.