Forex
Dollar retreats from 2-year peak after Trump Treasury nomination
By Wayne Cole and Medha Singh
(Reuters) -The dollar retreated on Monday after a stellar run as the pick for U.S. Treasury secretary seemed to reassure the bond market about fiscal discipline, pulling yields lower and shaving some of the currency’s rate advantage.
Yields on 10-year Treasuries slipped 6 basis points to 4.361% as President-elect Donald Trump’s choice of fund manager Scott Bessent was welcomed by the bond market as an old Wall Street hand and fiscal conservative.
However, Bessent has also openly favoured a strong dollar and supported tariffs, suggesting any pullback in the currency might be fleeting.
The dollar has risen for eight consecutive weeks with many technical indicators flashing overbought on bets Trump’s policies would stoke inflation and further support the greenback.
“Pricing in various U.S. assets was pushed quite aggressively in one direction for three weeks,” said Geoff Yu, senior macro strategist at BNY.
“Markets probably need to take a breather when it comes to their dollar positions.”
The was last at 107.22, down about 1% from its two-year high of 108.090 on Friday. The greenback dipped 0.3% versus the Japanese yen to 154.25, and further away from its recent peak of 156.76.
The euro edged up 0.6% to $1.0485 and away from Friday’s two-year trough of $1.0332.
RATE OUTLOOKS DIVERGE
The euro zone’s single currency had taken a hit on Friday as European manufacturing surveys (PMI) showed broad weakness, while U.S. surveys surprised on the high side.
The contrast saw European bond yields fall sharply, widening the gap with Treasury yields to the benefit of the dollar. Markets also priced in more aggressive easing from the European Central Bank, with the probability of a half-point rate cut in December rising to about 40%.
“Maybe it’s time euro weakness fades heading into the ECB decision because a lot of dovishness has been priced in but more importantly, because euro dollar has been so aggressively sold,” Yu said.
At the same time, futures scaled back the chance of a quarter-point rate cut from the Federal Reserve in December to 56%, compared to 75% a month ago, according to CME Group’s (NASDAQ:) Fed Watch Tool.
Markets now imply about 150 basis points of ECB easing by the end of next year, compared to around 70 basis points from the Fed.
Minutes of the Fed’s last meeting are due on Tuesday and will offer more clues on the U.S. central bank’s thinking behind policy moves so far.
Also due this week are figures on U.S. and EU inflation, which will further refine the outlook for rates.
Data on UK retail sales also disappointed, data showed on Friday, leading the market to price in more chance of a rate cut from the Bank of England, albeit in February rather than December.
Sterling bounced 0.3% to $1.2562 after hitting a six-week low on Friday at $1.2484.
In the crypto world, bitcoin was trading at $98,126 and off last week’s record top of $99,830, having run into profit taking ahead of the symbolic $100,000 barrier.
has climbed more than 40% since the U.S. election on expectations Trump will loosen the regulatory environment for cryptocurrencies.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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