Forex
Dollar slips, but on track for hefty gains in 2024
Investing.com – The US dollar edged lower Tuesday, but was still on course to record hefty gains in 2024 given the more cautious stance by the Federal Reserve regarding rate cuts and expectations for the incoming Donald Trump administration.
At 05:35 ET (10:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 107.830, but remains just below the two-year high seen earlier this month.
The index was still on course for monthly gains of around 1.5%, bringing year-to-date gains to almost 7%.
Dollar in demand
The Fed’s recent signal of fewer cuts in 2025 has provided renewed strength to the dollar, pushing the benchmark to a more than seven-month high last week.
The US central bank projected just two 25 bp rate cuts in 2025 at its last policy meeting of the year earlier this month, a sharp reduction from the four cuts it had indicated in September.
The election of Donald Trump as the new president also gave the dollar a boost as his policies of looser regulation, tax cuts, tariff hikes and tighter immigration are seen as both pro-growth and inflationary, and are likely to contribute towards the Fed’s cautious stance.
Trading volumes are likely to be limited Tuesday, ahead of Wednesday’s holiday, and the focus will then be on weekly numbers and data later in the week, as well as comments from FOMC member .
Euro looks to ECB rate cuts
In Europe, edged higher to 1.0409, trading in a tight range with the German market on holiday.
The pair is set for a decline of just under 6% this year, with the likely to cut interest rates more sharply than the Federal Reserve in 2025.
The ECB cut interest rates earlier this month and signaled more cuts ahead as economic growth in the region stagnates, while the US central bank recently cut its projection for rate reductions in the new year.
The eurozone economy could also suffer from President-elect Donald Trump’s trade policies, given the prospect of tariff hikes and the potential of a trade war.
traded 0.1% lower to 1.2539, moving in a tight trading range ahead of Thursday’s release.
That is expected to show that the country’s manufacturing sector remained firmly in contraction in December, after data showed that Britain’s economy failed to grow in the third quarter.
Chinese manufacturing activity expands in December
In Asia, rose 0.6% to 7.3443, after China’s expanded for a third straight month in December as a raft of fresh stimulus measures continued to provide support, purchasing managers index data showed on Tuesday.
However, the rise was slightly lower than market expectations and below the previous month’s reading.
Markets are holding out for more clarity on Beijing’s plans for stimulus measures in the coming year. Recent reports suggested that the country will ramp up fiscal spending to support economic growth.
traded 0.1% higher to 156.92 on Tuesday after it reached a five-month high in the previous session, with the pair up more than 11% over the course of the year.
The signaled that it will take its time to consider more interest rate hikes after the central bank held interest rates steady at 0.25% at this month’s meeting.
Investing.com – The US dollar has gained strongly since the US presidential election in November, but these gains are unlikely to limit the hit that US customers are likely to face from tariffs, according to UBS.
At 08:25 ET (13:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 108.950, but was around 1.5% higher over the last month, and remained not far from the more than two-year high seen last week.
The theory is that a stronger dollar lowers US import prices, said analysts at UBS, in a note dated Jan. 17. Those lower prices would partially offset the tax payments US consumers must make to the US Treasury when buying imports.
If the US paid for the Chinese imports, then a stronger dollar would automatically reduce the amount of dollars paid (fewer dollars are exchanged to pay the renminbi price). However, the US pays for practically all its imports in dollars, so this does not happen.
If the dollar strengthens, the dollar price is unchanged, unless the exporter consciously chooses to lower the dollar price of the goods sold, UBS added.
An exporter to the US might deliberately lower dollar prices, as (in dollar terms) local currency costs are lower. But local currency costs are only a fraction of a manufacturer’s costs.
“A Chinese electronics manufacturer, importing chips (bought in dollars) and exporting computers to the US (in dollars), will probably keep their dollar prices stable—ignoring currency moves,” UBS added.
The US dollar strengthened against China’s renminbi in 2016 and 2018/19, and US import price inflation for products from China showed no noticeable break with earlier trends.
The preference seems to have been to reroute supply chains as a way of avoiding trade taxes.
Investing.com – The US dollar slumped Monday following a report that indicated that President-elect Donald Trump was set to delay imposing trade tariffs immediately upon his inauguration, an expectation which had boosted the US currency following his November election victory.
At 09:20 ET (14:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 1.1% lower to 108.020, having climbed to a more than two-year high last week.
The Wall Street Journal reported Monday that Trump is planning to issue a broad memorandum on his inauguration that directs federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbors—but stops short of imposing new tariffs on his first day in office.
The memo, which the WSJ has seen, suggests that debates are still ongoing within the incoming administration over how to deliver on Trump’s campaign trail promises for hefty tariffs on imports from trade rivals such as China.
The dollar has gained around 4% since the November presidential election as traders anticipated Trump’s policies will be inflationary, necessitating higher interest rates for a longer period.
“Financial markets are on tenterhooks to see what executive orders newly elected US President Donald Trump will enact on his first day,” said analysts at ING, in a note.
“FX markets are most interested in what he has to say about tariffs and what kind of pain the Oval Office plans to inflict on major trade partners.”
Bank of America (BofA) noted a significant increase in repo rates during the week of January 13 due to heightened liquidity demand triggered by tax payments and limited funding provided by the People’s Bank of China (PBoC).
The liquidity squeeze was most noticeable on January 16, the day following the tax payment deadline, with DR007 and R007 reaching 2.34% and 4.19%, respectively.
The PBoC maintained its stance on defending the exchange rate stability, resulting in the tightness of (RMB) liquidity being felt in the offshore market as well.
On January 9, the central bank announced it would issue RMB60 billion of 6-month bills in Hong Kong, a significant increase compared to previous issuances. The coupon rate of 3.4% was notably higher than the December issuance, reflecting the tightness of CNH liquidity and subdued demand from investors.
The December FX settlement balance by banks’ clients fell further to a deficit of US$10.5 billion, the first deficit reading since July 2024. A key change from the previous month was a sharp increase in USD demand for service trade. Reports also suggest that domestic importers have been actively purchasing USD via FX forward to hedge against tariffs risk in recent weeks, which has been exerting upward pressure on forward points.
On January 13, the PBoC increased the cross-border macroprudential parameter to 1.75 from 1.50. This move allows domestic corporations and Financial Institutions (FIs) to conduct more cross-border borrowing.
Given the widened interest rate gap between China and overseas, BofA believes this is more of a symbolic move by the PBoC to anchor market’s expectation on FX.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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