Daily Market Pulse

The Dollar takes a breather

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, slides 0.6% during Wednesday’s closing session. The US dollar index, on Wednesday, increased by more than 0.2% after the Fed monetary policy decision announcement, reaching a 16-month high reached in November followed by a modest downturn, while heading into Thursday's session, amid Omicron concerns and prevalent risk-on mood, which is reflected by the positive tone in equity markets. During the policy meeting, the Federal Reserve said that it will accelerate its tapering to $30 billion per month, putting it on schedule to complete its program by March 2022 and clearing the way for three interest rate rises by the end of the year. Elsewhere, U.S. stock futures increased on Thursday as well as the yield on the benchmark 10-year Treasury note which extended advances to 1.46% after a Federal Reserve statement. Meanwhile, the dollar remained sensitive to the rapidly spreading Omicron variant, as possible damage to the global economy may obscure the outlook and postpone the start of stimulus and rate hikes. Moving ahead, traders will look out for Markit manufacturing PMI and Markit Service PMI to provide further direction. 


The Euro surged 0.27% against the dollar towards the end of Wednesday’s session. The common currency, after surging yesterday, maintained its uptrend against the greenback, trading near weekly highs while heading into Thursday's European trading session. The uptick was sponsored by the U.S. dollar’s retracement this morning. Risk-on mood and omicron concerns undermine the greenback and provide the tailwind for the Euro. Meanwhile, European Central Bank (ECB) policymakers are expected to decide on the future of the bond-buying program amid worries over the region's sluggish economic growth as a result of rising consumer prices and new COVID restrictions. Elsewhere, the Eurozone PMI release did little to influence the Euro price dynamics. Market participants, in today’s session, will now focus on the ECB monetary policy decision to provide a new direction for the Euro. 


The Sterling rose 0.23% against the greenback during Wednesday’s closing. The British pound was slightly higher on Thursday as investors awaited the outcome of the Bank of England's policy meeting later today, with policymakers expected to exercise caution following the imposition of tougher restrictions on COVID-19 in England in response to the rapid spread of the Omicron variant. They should, however, express concern about mounting inflationary pressures. British consumer price inflation increased more than predicted to 5.15% in November, the highest level since September 2011, while production prices increased 9.1%, the highest level since September 2008. Meanwhile, FTSE 100 stock futures were seen opening 61 points higher on Thursday, seeking to end a six-day losing streak and rebound from two-week lows, as investors moved their attention away from the U.S. Federal Reserve's monetary policy decision and toward the Bank of England meeting later in the day. Investors will also be watching the UK economy's December flash PMI results.


The Japanese Yen fell 0.30% against the U.S. dollar on Wednesday’s closing session followed by extending its downtrend for Thursday morning. The Japanese yen sank against the US dollar on Thursday, as the Federal Reserve's tapering decision boosted market risk appetite and pushed the safe-haven Yen down. The yen also fell as Bank of Japan governor Haruhiko Kuroda repeated that the central bank's ultra-loose monetary policy will be maintained to promote greater salaries and a sustained economic recovery when the board meets this Friday. Elsewhere, Japanese stocks rallied higher while the Private sector growth eased in December. The Nikkei 225 Index rose 2.13%, while the wider Topix Index gained 1.46% as Japanese equities followed their U.S. counterparts higher. The composite PMI for Japan decreased to 51.8 in December 2021 from 53.3 in November, the highest number since October 2017. Market participants in the day ahead will take cues from broader market sentiments while remaining focused on the BoJ monetary policy announcement tomorrow to provide further impetus to the Yen. 


The Loonie surged by 0.22% against the greenback on Wednesday’s closing followed by a continuing uptrend while heading into the European trading session. The Canadian dollar, in yesterday's session, traded near a 16-week low, set on August 20th, owing to reduced oil prices and the Fed's announcement of monetary policy moves, however, the Loonie recover the losses due to increased risk appetite, reflected by the positive tone around equity markets and the rise in crude oil prices by 1.4% on Thursday. Elsewhere, Prime Minister Justin Trudeau anticipated economic growth of 4.6% this year, down from the 5.8% forecast in April, as he provided a fiscal update anticipating a smaller-than-expected fiscal deficit in 2021-22. Moving ahead, market participants will be looking out for economic data releases from the U.S. docket as well as oil price dynamics to provide further direction. 


The Mexican Peso surged 1.05% against the dollar during Wednesday’s closing, erasing the previous session losses. The Peso rise comes after the Federal reserve’s monetary policy announcement which mentioned the accelerated pace of the bond purchase program and paving the way for interest rate hikes in the coming year. Meanwhile, the positive tone in equity markets piqued the risk appetite and acted as a tailwind for the Peso. Looking forward, Market participants are anxious for the interest rate decision today as the Central bank of Mexico (Banxico) will announce its monetary policy decision. Economists expect Banxico will likely raise the interest rate by 25 basis points, however, there is also a possibility for 50 basis points. 


The Chinese Yuan gained 0.01% against the U.S. dollar at the closing of Wednesday’s session. On Thursday, the offshore yuan traded with tepid losses/gains against the U.S. dollar, as traders remained cautious on fears that authorities may rein back the currency's recent rise. Since mid-November, the People's Bank of China's official midpoint has consistently been lower than market forecasts. Additionally, the central bank has increased its purchases of foreign currency from banks and increased the foreign exchange reserve requirement ratio by 200 basis points to 9% beginning December 15. Meanwhile, the PBOC infused 500 billion yuan into the financial system on Wednesday through its medium-term lending facility but maintained the interest rate at 2.95% for the 20th consecutive month. Elsewhere, The Shanghai Composite Index surged 0.75% on Thursday, while the Shenzhen Component Index gained 0.58%, boosted by increases in coal equities as a result of a government crackdown on unlawful mining.


The Brazilian Real rose 0.07% against the U.S. dollar on Wednesday’s closing. Yesterday's session was marked by enormous volatility amid comments by Fed Chairman Jerome Powell. The Brazilian currency plummeted on the day, however, it gained slightly in the closing, with investors reassessing the scenarios and impacts of the normalization of the North American policy. Additionally, exchange pricing is not trivial in global terms, however theoretically (or at least the expectations) suggest that a tightening of monetary conditions in the U.S. could favor the dollar, adding pressure to Real in 2022. Meanwhile, yesterday we also saw that the Central Bank's Economic Activity Index (-0.40% in October) did not bring any news, it only reinforced the perspective that we will have another quarter of recession in economic growth (GDP). For today, participants will continue to follow closely the telenovela of the ¨PEC of Precatórios''.


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