Currency markets’ implied volatility has fallen amid relatively stagnant FX spot rates.  Over the course of 2025, the Bloomberg U.S. Dollar Index declined, but the scale of its move has been small by historical standards (Figure 3). By contrast, precious metals prices have soared with gold and silver hitting new record highs while platinum and palladium prices rose by nearly 90% between April and October 2025 (Figure 4). So, what’s the macroeconomic driver pushing precious metals prices higher even as exchange rates barely moved? And, what will happen to precious metals and currency rates if central banks reverse course and begin raising rates in 2026?

Part of the reason why currency markets have been so placid in 2025 is that it’s difficult to distinguish and differentiate among the various fiat currencies as the underlying macroeconomic, monetary and fiscal conditions are so similar. In a nutshell, in most countries, the following statements are true:

1. Core inflation is running above targets
2. Nearly all central banks are cutting rates despite above-target core inflation
3. Most countries are seeing rising unemployment rates and soft economic growth
4. Fiscal dominance: many countries are running large fiscal deficits and have no plan to rein them in 

While this makes it difficult to distinguish among the various fiat currencies, it has sent investors hunting for assets that central banks cannot print.

When one looks at the 21 largest economies with floating exchange rates that are not currently at war or suffering hyperinflation, one finds inflation exceeds central bank targets by about 1% on average. There are exceptions such as China and Switzerland, but everyone else is seeing inflation at above target. 

Not only is inflation above target but in most cases it's rising: Of these 21 currency areas, year on year core inflation has risen, on average, by 0.2% over the past six months. Among them, core inflation has risen in 12 currencies, fallen in four and remained unchanged in five (Figure 5 and appendix for further charts).

Source: Bloomberg Professional (Core Inflation Rates)

The reason why inflation rates are nearly universally above target varies from one country to another. In the U.S., U.K. and Eurozone, services are driving inflation.  In other countries like those in Latin America, higher goods prices are the main contributors. The deeper, underlying reason has to do with the massive monetary and fiscal stimulus that occurred in most of the world. Many countries spent 10-20% of GDP on pandemic-related COVID relief. Moreover, many central banks slashed rates in 2020 and didn’t begin to tighten policy until 2022. They then tightened dramatically into 2023. The one exception has been China, which spent 3% of GDP on COVID relief, never experienced a post-pandemic wave of inflation and whose central bank hasn’t tightened policy since 2017. Finally, rising protectionism, the nearshoring and onshoring of supply lines, increased military spending and demographic factors may be adding to inflationary pressures. 

What’s curious though is that central banks are now almost universally easing policy despite inflation running above target nearly everywhere.

There are only two central banks that raised rates in 2025: the Bank of Japan and Banco Central do Brasil. Everyone else has cut rates (Figures 6, 7, 8 and 9).

Among the big questions that economists and investors must grapple with are: 

1. Will the global easing of monetary policy lead to faster economic growth? 
2. If economic growth does pick up, will core inflation rates rise further? 
3. Will central banks have to reverse course and tighten policy in 2026? 
4. If so, how might an eventual policy tightening impact FX and precious metals markets? 

One could argue that easing monetary policy with inflation still above target could trigger subsequent waves of inflation. This appears to be the scenario priced into precious metals markets. The counter argument is that precious metals investors might be overpricing the risk of higher inflation because the central bank easing has happened in response to falling inflation rates in 2023 and 2024 and that real interest rates remain relatively high (Figure 10). From this perspective, central banks may still be hitting the brakes, just less hard than they were 12 or 24 months ago. 

As for investors’ expectations, short-term interest rates futures markets price further easing in the U.S., where traders in SOFR and Fed funds futures center their expectations around 3% Fed funds rates by the end of next year. Similarly, UK Short-Term Interest Rates (STIRS) investors see some potential for further easing by the Bank of England as well. Traders also see a small potential for further easing in Canada and the Eurozone early in 2026 before some possible tightening later in 2026 or 2027. Meanwhile, traders see the potential for higher rates in Australia and Japan. Japan is an outlier in this regard as the Bank of Japan’s policy rate remains far below the rate of core inflation (Figure 11).

If monetary policy diverges across currencies, with some central banks tightening as others continue to ease, this could give rise to strong trends and higher volatility in exchange rates. Typically, currencies whose central banks are tightening policy tend to rise in relation to those whose central banks continue to ease policy. That said, interest rate movements are only one of a number of macro factors that influence exchange rates, along with relative changes in the size of the budget and current account deficits as well as changes in relative rates of economic growth. Generally, investors prefer to see shrinking budget and current account deficits (or expanding surpluses) and prefer currencies with accelerating growth rates versus those with slowing growth. 

For precious metals, the scenario of lower rates in the U.S. and flat to higher rates elsewhere might not be a bad scenario as they are priced in USD and, hence, more sensitive to USD than to other currencies. That said, if the Fed were to surprise markets and hike rates in 2026, that could come as a major shock to precious metals, which typically react negatively to upward moves in rate expectations. 

One might wonder why central banks have been easing given that inflation is above target and rising in so much of the world? The answer has to do with slow growth and, in particular, weakness in employment markets. In many countries, hiring has ground to a halt and unemployment rates are slowly drifting higher. Australia, Canada, New Zealand, Switzerland and the U.S. have seen unemployment rates trend higher, as have Eastern European countries. In the Eurozone, Japan, South Korea and much of Latin America, unemployment rates have held steady, and they have fallen in Brazil, which may explain why Banco Central do Brazil has bucked the global trend and raised rates (Figures 12-14). The good news is that we aren’t seeing the kinds of mass layoffs that have happened during past recessions. Still, central banks appear to be favoring keeping economies growing over fighting inflation.

The U.S. labor market highlights the complexity of central banks’ dilemmas. While employment growth has slowed significantly, American wages continue to rise at a reasonably fast pace. This means that the overall amount of compensation going to the labor force continues to grow at around 5% per year, slightly above the 4-5% pace that dominated the 2010s (Figure 15).

Despite having unemployment at just 4.4% (as of September) and revenues from tariffs that have risen from 0.2% to 1.1% of GDP so far this year, the U.S. continues to run a budget deficit of 6% GDP, which is exceptionally large for this stage of the economic cycle. And the U.S. is hardly alone. The UK is running a budget deficit of 4.5% of GDP. In France, it’s 5.5% of GDP.  Deficits in Germany appear to expand in 2026 as the new government increases defense and infrastructure spending. It’s a similar story in Japan, where the new Prime Minister is calling for increased fiscal stimulus despite having a public debt to GDP ratio of nearly 200%. 

Meanwhile, it’s a similar story in many middle-income countries. Brazil and China are running budget deficits of 8.5% of GDP. In China, tax revenues have fallen from 29% to 21% of GDP since 2017. Mexico is running a budget deficit of 4% of GDP, significantly larger than has been the case historically and with record low unemployment.

What’s more is that few of these countries are taking decisive actions to rein in deficits. The global trend has been to shift from the central bank dominance of recent decades, where fiscal policy was either constrained by or took a back seat to monetary policy, to fiscal dominance. With fiscal dominance, central governments tend to run large deficits, and central banks are left to choose to what extent to try to rein in inflation or favor growth.

With so many countries in the same (or similar) boat(s), it’s been difficult for investors to distinguish between one government issued fiat currency and another. As such, exchange rates movements have been dampened. But this could change in 2026 if monetary and fiscal policy, as well as growth rates, begin to diverge.  

By contrast, over the course of 2025, many investors concluded that the value of fiat currencies in general is falling relative to precious metals. This trend could continue into 2026 if budget deficits widen further and if central banks continue to ease policy in the face of above-target inflation. 

That said, those with long positions in precious metals face a significant risk that more central banks might follow the example of Banco Central do Brasil, which raised rates in the face of somewhat higher than desired inflation. Banco Central do Brasil has been a leading indicator of other central banks so far this decade, raising rates before other Latam central banks and the Federal Reserve in 2021, and then cutting rates before the others in 2023. Should other central banks follow Brazil’s lead once again, it could halt the move towards higher precious metals prices just as the 2022-2023 round of rate hikes caused precious metals prices to correct and consolidate.