Daily Market Pulse

The Dollar consolidate losses amid a shift in risk sentiment

6 minute read


The U.S. dollar index, a coefficient used to assess the performance of the greenback against a basket of six major currencies, closed down 0.04% and consolidated losses during the early hours of today’s session after two consecutive sessions sustaining pressure. The greenback struggles to find demand amid a positive shift in risk sentiment, although a pickup in U.S. treasury yields limits its losses. The benchmark 10-year U.S. Treasury Bond Yield attempted to test 1.5%, although lost momentum retreating back to 1.46% on Wednesday. Mixed news surrounding the Omicron variant keeps market participants cautious, although we witnessed a rebound in the equity market as investors took advantage of some dip buying during yesterday’s trading session.   Coming up, the U.S. Bureau of Economic Analysis will release its  Gross Domestic Product reading for the third quarter, which could spark significant momentum amongst market participants. Additionally, Consumer Confidence reading and Existing Home sales are also set to be released today. 


The Euro closed 0.05% higher against the U.S. dollar yesterday, and it continues to edge higher during the early hours of the Wednesday session as it is looking to record its third consecutive session erasing losses against the dollar. The European Commission posted Consumer Sentiment readings revealing that morale in the eurozone has deteriorated in the past month, with the index falling to -8.3 in December from -6.8 in November amid the outburst of the Omicron variant and local governments announcing lockdown and control measures to stem the spread of the new strain. A lack of news or data releases will keep the focus on Covid related headlines and risk flows will be the main drivers for the pair in the days ahead. 


The Pound Sterling edged 0.42% higher against the dollar by Tuesday close and this momentum was sustained during the early hours of Wednesday amid cautious optimism in global markets. The positive momentum comes off the back of better than expected growth figures in the U.K. as the office for national statistics reports that the economy expanded 6.8% in the third quarter, exceeding expectations at 6.6%. Additionally, Prime Minister Boris Johnson underpinned the British Pound after ruling out the possibility of imposing additional restrictions before Christmas amid the spread of the virus. However, the rise in Covid cases in the U.K. acts as a  headwind for Sterling as Britain reported 90.6k new Covid-19 cases yesterday limiting the potential for the currency. 


Concerns about the rapid spreading of the Omicron variant eased following reports that existing vaccines may be more effective than initially thought. The news nurtured the risk sentiment amongst market participants weighing over safe-haven currencies. The Japanese Yen retraced 0.44% as investors gear up their approach to riskier assets, with the greenback earning support from U.S. Treasury Yields edging higher. Moreover, dovish minutes of the latest Bank of Japan meeting reaffirmed the stance adopted by Japanese policymakers as board members support the need to maintain the ultra-loose policy as inflation remains below 2%. 


The Loonie advanced 0.2% against the greenback amid an improvement in risk sentiment in the global markets and a pick up in crude oil prices underpinning the commodities linked currency. Headlines around better than initially thought efficiency of the vaccines against the omicron variant has nurtured risk sentiment limiting potential losses for the Canadian dollar. Crude oil prices gained following the shift in risk sentiment acting as a tailwind for the loonie with West Texas Intermediate advancing 2.76% during yesterday’s trading session and it currently changes hands above USD 71 per barrel. 


The Mexican peso finished 0.11% lower against the U.S. dollar although it showed upward movement heading into Wednesday's trading session. The Mexican peso declined marginally on reports that Mexico's central bank (Banxico) is not committed to a steady pace of half-point rises in its benchmark interest rate after a similar hike in December. Additionally, Governor Alejandro Diaz de Leon said that Banxico anticipates inflation to peak in the fourth quarter, based on the official prediction of a 7.1% rise in consumer prices on average during the fourth quarter. Elsewhere, Covid instances have been increasing internationally, as the more infectious Omicron variant has gained a foothold and more governments have implemented additional restrictions.


The Chinese Yuan closed 0.03% higher against the U.S. dollar.  On Wednesday, the offshore yuan traded at yesterday’s high level with minor gains/losses as trade activity slowed ahead of the year-end festivities. Meanwhile, market players' emphasis has switched to whether the currency can maintain its current success next year, with traders reducing long holdings over the last two weeks amid fears that authorities may rein in the currency's recent advances. Meanwhile, the Shanghai Composite Index dipped 0.07% on Wednesday, while the technology-heavy Shenzhen Component Index rose 0.7%, as traders rushed to unwind short positions in battered Chinese technology and other growth firms as the year came to a close. Investor optimism was also boosted by increased risk appetite and policy support expectations.


The Brazilian Real closed 0.33% lower against the U.S. dollar and continues heading downwards during Wednesday's early trading session. This follows in the wake of the Central Bank's return to the markets through a spot currency auction. Along with local seasonal factors that historically increase demand for the dollar, such as companies paying interest and dividends at the end of the year, the last few days have seen increased volatility in international markets, amid concerns about the economic impact of the omicron variant of the coronavirus and harsher inflation signals from large central banks. Meanwhile, implied inflation has declined considerably in the month after the decline in activity, as the forecast for August 2022 bond maturities linked to the National Index of Consumer Prices (IPCA) fell from 6.82% a month earlier to 4.98% on Monday. Elsewhere, Brazil's largest stock index, the Bovespa, is rising, driven by an increase in global demand for risk and In an auction for the sale of dollars in cash, the central bank invites bids totaling US$ 500 million.


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