Daily Market Pulse

The Dollar preserves its power

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, surged 0.23% during Monday’s closing session. The U.S. dollar preserves its strength as investors stay cautious ahead of central banks meeting later this week. Meanwhile, the greenback is gaining demand due to the risk-off mood, which spurred after the first death was reported in the UK due to the Omicron variant. In China, at least 20 manufacturing companies have shut down their operations due to the outburst of the virus. Market participants are focused on the Fed's Summary of Economic Projections (SEP), which consists of a dot-plot chart to show interest rate hikes; expectations are set for two rate hikes in 2022. Moving ahead, traders will be looking to the Producer Price Index to provide fresh momentum to the dollar index before the monetary policy meeting tomorrow. 


The Euro declined 0.26% against the dollar towards the end of Monday’s session. The Euro stayed pressurized by U.S. dollar strength and it was observed to be trading in a narrow band near the overnight low levels during the early hours of Tuesday, even though the Federal Reserve is expected to move ahead with rate hikes and measures to contain inflation. The European Central Bank’s (ECB) policymakers have defended any talks to counter inflation and adopted a dovish stance, which undermines the currency further in addition to the Omicron virus-led risk-averse mood. Meanwhile, the downside for the Euro is limited as traders remain sidelined ahead of ECB’s key events. Looking forward, market participants will get Eurozone Industrial Production data, which will be used along with broader market sentiments to provide further direction to the Euro. 


The Sterling fell 0.42% against the greenback during Monday’s closing. Sterling, on Tuesday morning, remained defensive and struggled to make meaningful gains on the macro data release. The UK Office for National Statistics reported a 49.8K decline in unemployment benefit claims in November, compared to a 14.9K drop in October. Additionally, the ILO Unemployment Rate fell from 4.3% to 4.2% in October. While the odds of Bank of England’s (BoE) rate hike are fading slowly due to Omicron chaos in the country, the statistics did little to provide any meaningful traction to Sterling. Meanwhile, the Brexit uncertainties and Northern Ireland protocol also weigh on Sterling. Market investors are looking forward to the Fed's monetary policy meeting this week, followed by the Bank of England's monetary policy meeting, which will give further momentum.


The Japanese Yen slid 0.09% against the U.S. dollar on Monday’s closing session. The Yen remained defensive against the greenback during the Asian trading session on Tuesday. The U.S. dollar struggled to make any major gains against the Japanese Yen as the general softer risk tone bolstered the safe-haven Japanese Yen and limited the dollar's additional gains. Additionally, the U.S. treasury yields declined, providing further upside opportunities for the Yen. Meanwhile, investors' risk appetite reduced due to emerging concerns of the Omicron virus. This was reflected by a cautious tone in equity markets, which acted as a tailwind for the Yen. Meanwhile, the Bank of Japan (BOJ) is set to maintain its ultra-easy policies at the scheduled meeting later this week but is expected to consider whether to scale back on pandemic-related emergency funding. Market participants now look forward to the U.S. Producer Price Index during the North American session today, while the key focus will be on the U.S. monetary policy meeting tomorrow to provide fresh impetus to Yen. 


The Loonie declined by 0.67% against the greenback on Monday’s closing, followed by it extending its downtrend modestly while entering the European season on Tuesday. While the recovery in crude oil prices from the overnight retracement slide provides strength to the Loonie, the U.S. dollar’s modest strength on Tuesday acted against and pressurized the commodity-linked Loonie. Moreover, Tiff Macklem, Governor of the Bank of Canada stated on Monday that the bank is focused on bringing inflation back down to its target without choking Canada’s recovery. Additionally, he expressed concerns that the imposition of new COVID-19 restrictions in Europe and Asia would reduce fuel consumption, which might limit crude oil price rises. Aside from that, rising expectations that the Fed would tighten monetary policy sooner than planned should restrict any major gains for the Loonie. Market participants are now waiting for the Fed's monetary policy meeting on Wednesday to provide further price momentum to the Loonie. 


The Mexican Peso declined 0.64% against the dollar during Monday’s closing. The Mexican economy dropped 0.2% from the previous quarter, the country's first recession since the pandemic's recovery started. Additionally, currency weakness will affect Mexican buying power, and despite some pent-up demand as a result of the holiday season ahead, it will eventually fall. Meanwhile, falling economic activity and looming supply chain dents argue against the tightening of monetary policy and keep the stimulus support active. Moving ahead, market participants are waiting for the U.S. Federal reserve’s monetary policy decision, which is widely expected to tighten amid high inflations, to provide further direction to the Peso.


The Chinese Yuan surged 0.05% against the U.S. dollar at the closing of Monday’s session. On Tuesday, the offshore Yuan continued to edge higher against the U.S. dollar as robust business demand for the local currency remained supportive. Meanwhile, the Shanghai Composite Index slid 0.5%, while the Shenzhen Component Index declined 0.3%, after China revealed its first case of the omicron form in Tianjin, around a two hours' drive from Beijing's capital. The country has pursued a tough “zero-tolerance” policy on virus outbreaks, which can mean sudden neighborhood lockdowns or travel restrictions. Moving forward, market participants in China are waiting for the Industrial Producer Index of November, expected at 3.6%. Elsewhere, traders remained cautious amid expectations for the Federal Reserve to signal a quicker tapering of asset purchases and an earlier start to rate hikes this week.


The Brazilian Real plummeted 1.19% against the U.S. dollar on Monday’s closing. The Central Bank of Brazil attempted to inject liquidity in the market, however, it gave little meaningful traction to the Real. With the end of the year approaching, there is capital flow because of remittances of profits and dividend payments, which increases foreign currency demand and weakens the Real. Although the market is already pricing a tougher Fed tone, there is still room for surprises in this regard. The outlook is that the Fed's monetary policymakers anticipate their expectations for interest rate increases in the U.S., increasing the attractiveness of the U.S. dollar. Additionally, the Lower House will vote today on the PEC of Precatórios defending limiting payments until 2036 and not 2026 (this is the part that has changed the Senate vote). Meanwhile, if deputies do not approve the current text, the PEC would return to the Senate to be voted on - which everyone wants to avoid. 


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