Daily Market Pulse

Dollar continues to rise over bearish market tone

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.29% higher and continues to extend its momentum with modest gains on Tuesday morning. In the face of growing geopolitical tensions and fresh fears about a global economic downturn, safe-haven flows continue to dominate the financial markets. The U.S. dollar index rose to two-week highs for the first time before dropping somewhat in the late American session on Monday. The minor decline occurred after the release of PMI data. In January 2022, the IHS Markit U.S. Composite PMI fell to 50.8 from 57.0 the previous month, the weakest rate since July 2020. Both industrial and service sector sectors reported near-stagnant production in the face of weakening market conditions, increased supply chain disruptions, and labor shortages related to the Omicron wave. Meanwhile, the Federal Reserve is scheduled to end its two-day meeting on Wednesday, and although no rate change is likely, there have been growing expectations for the central bank to accelerate its tightening plans in order to contain stubbornly high inflation. Moving on, Housing Price Index and Consumer Confidence will be featured in U.S. economic docket to provide fresh momentum to the dollar index. 


The Euro closed 0.11% lower and continues to head downwards on Tuesday morning. The major currency loses momentum for the second consecutive session on Tuesday, amid the greenback's continued rebound. Additionally, there is little optimism around the Euro, especially in light of the Fed's impending start of the tightening cycle vs the ECB's accommodative-for-longer approach, despite the fact that the Euro area's high inflation is showing no signs of abating for the time being. Meanwhile, investors are anticipated to remain cautious ahead of Wednesday's FOMC meeting, as the geopolitical landscape - with Russia, Ukraine, and the U.S. at the center of the argument - remains tense. Moving forward, the German Business Climate, as measured by the IFO poll, will get all of Tuesday's focus ahead of the publication of U.S. economic statistics. 


The Pound Sterling closed 0.46% lower before consolidating its losses on Tuesday morning. Concerns over the UK's political future, mixed with a growing risk-off sentiment, weighed on the high-beta currency, the British Pound, maintaining its gloomy tone. Additionally, NATO's readiness to deploy soldiers in Eastern Europe as geopolitical tensions between Russia and Ukraine escalated frightened markets and boosted demand for the U.S. dollar as a safe-haven currency, hurting the Sterling. Elsewhere, the United Kingdom's public sector net borrowing was £16.8 billion in December 2021, the fourth-highest December borrowing since monthly records started in 1993, but less than a year earlier, which stood at £24.4 billion. Additionally, the FTSE 100 edged higher on Tuesday, attempting to recoup from its lowest day since late November, aided by a rise in tourism-related stocks. However, market volatility is expected to persist as investors remain concerned about Ukraine-Russia tensions, as well as while awaiting the U.S. Federal Reserve's monetary policy announcement tomorrow.


The Japanese Yen closed 0.26% lower before regaining its pace on Tuesday morning. The Japanese currency strengthened against the U.S. dollar this morning as Ukraine tensions, approaching Federal Reserve policy tightening, and broader inflationary concerns boosted the Yen's safe-haven appeal. Meanwhile, the Bank of Japan warned of expanding inflationary pressures in its latest quarterly outlook report, projecting core consumer prices to reach 1.1% in the fiscal year ending March 2023, and warning that inflation could accelerate more quickly than expected if raw material costs continue to rise. Elsewhere, the Nikkei 225 Index sank 1.66%, while the wider Topix Index slid 1.72% on Tuesday as investors remained cautious amid Ukraine-related tensions, expanding inflationary concerns, and increased expectations of a more aggressive Federal Reserve tightening. Moving forward, U.S. economic data release will provide further direction to the Yen. 


The Loonie closed 0.52% lower followed by consolidating its losses on Tuesday morning. The Canadian dollar fell to its lowest level since January 10th, as bearish risk sentiment pushed the dollar higher. Both the U.S. central bank's and the Bank of Canada's monetary policy decisions are on traders' radars, as both are anticipated to outline policy tightening in response to increasing inflation. The Fed is expected to increase interest rates in March and begin shrinking its balance sheet later this year, but the size of the rate hike remains unknown. Additionally, tensions between Russia and NATO over Ukraine showed no evidence of easing, pushing investors to seek refuge in safe-haven assets. Meanwhile, in Canada, the new coronavirus strain proved to be milder than expected, while economic activity and inflation statistics continued to show signals of acceleration, encouraging investors to bet on a possible rate hike at the Bank of Canada's monetary policy meeting due tomorrow. 


The Mexican Peso finished 0.50% lower and continues to extend its downtrend modestly on Tuesday morning. The Mexican Peso dropped to its lowest level since December 28th, as the U.S. dollar rose on negative risk sentiment. Additionally, investors are preparing for this week's U.S. Federal Reserve meeting, during which the Fed is likely to accelerate its tightening plans. Furthermore, tensions between Russia and NATO over Ukraine showed no evidence of improvement, pushing investors to seek refuge in safe-haven assets. Domestically, early statistics indicated that the GDP likely fell by 0.2% in December, indicating a dismal finish to last year's fourth quarter. Simultaneously, according to a recent assessment by JP Morgan, the Mexican economy faces a possible credit rating downgrade in the near future as a result of political events, including the expected passage of a controversial energy bill. 


The Chinese Yuan closed 0.05% higher on Monday. The Yuan stayed at a more than three-and-a-half-year high against the U.S. dollar, boosted by higher central bank fixings and robust corporate demand ahead of the Lunar New Year break. Meanwhile, the Yuan continued to strengthen despite Beijing's policy easing, with the People’s Bank of China (PBoC) reducing many key short and medium-term interest rates to spur development. Additionally, China's policy actions stood in stark contrast to those of other developed countries, which are on course to normalize monetary policy this year. Elsewhere, analysts anticipate the PBOC to accelerate its easing measures in the first half of the year, with more rate cuts and a decrease in the bank's reserve requirement ratio in the first quarter.


The Brazilian Real closed 0.21% lower against the greenback on Monday. The Brazilian Real traded at its lowest level since January 18th, as the market was driven by bearish risk sentiment. Additionally, investors are bracing for the U.S. Federal Reserve's policy meeting later this week, at which the Fed is likely to signal a more hawkish posture in response to increasing inflation. Also, the tensions between Russia and NATO over Ukraine are causing investors to seek refuge in safe-haven currencies. Meanwhile, domestically, President Jair Bolsonaro signed the 2022 budget into law, which forecasts a 2.1% growth rate for the Brazilian economy in 2022 and total expenditures of 4.7 trillion Reals, of which 1.8 trillion Reals would be used to repay public debt. Additionally, the budget legislation allocated 89.1 billion Reals to the Auxílio Brasil program, 4.9 billion Reals to the electoral fund, and 1.7 billion Reals to federal government servants’ readjustment until 2022.


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