Dollar Gains Momentum as Risk Rally Takes a Pause

The US dollar maintained its position close to a two-week high on Wednesday, continuing its surge from the previous day. 

The rally was supported by elevated US Treasury yields and a cautious market sentiment that had a dampening effect on Wall Street.

Trading activities remained relatively subdued, with Japanese markets closed for a holiday and investors anticipating crucial US economic releases later in the day. 

This includes the release of minutes from the Federal Reserve’s December meeting.

The euro, after experiencing a 0.95% drop on Tuesday, rebounded slightly, up 0.12% against the dollar at $1.0954. 

Meanwhile, the dollar index, tracking the currency against six major peers, dipped slightly to 102.18 but retained the majority of the previous day’s gains.

The end-of-year surge in risk appetite, triggered by a decline in inflation and a dovish shift in the Federal Reserve’s December policy meeting, had led to expectations of US rate cuts in 2024. 

However, this sentiment did not carry over into the New Year. 

In the first trading session of 2024, the S&P 500 and Nasdaq Composite closed lower, influenced by a decline in big tech names. 

Treasury yields rose as prices fell, making US debt more attractive and bolstering the dollar.

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Dollar Strengthens Against Yen

The US dollar maintained its position close to a two-week high on Wednesday, continuing its surge from the previous day.

Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets, expressed skepticism about the late December optimism, stating that the market may have been overly optimistic about imminent Fed cuts in the first quarter, leading to the initial weakening of the dollar.

The dollar made further gains against the Japanese yen, up 0.43% at 142.57 to the dollar, building on the previous day’s 0.82% increase.

Investors are eagerly awaiting the minutes from the Fed’s December meeting, scheduled for 1900 GMT (2 p.m. ET), hoping to gain insights into the central bank’s plans regarding the number of rate cuts this year. 

Additionally, market movements could be influenced by US job openings data for November and a survey-based gauge of the manufacturing sector.

The New Zealand dollar, often viewed as a risk appetite proxy, edged 0.11% higher at $0.6259, recovering from a two-week low earlier in the day. 

Sterling also saw a rebound, gaining 0.21% to $1.2646 after a 0.87% decline in the previous session, marking its sharpest daily fall in nearly three months.

Analysts suggested that the risk-off sentiment might be partially fueled by concerns over escalating geopolitical tensions. 

This follows Israel’s drone strike in Lebanon’s capital, Beirut, which resulted in the killing of Hamas deputy leader Saleh al-Arouri on Tuesday. 

Ray Attrill, Head of FX Strategy at National Australia Bank, emphasized that markets might find it challenging to ignore geopolitical developments as they commence the new year.

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