Daily Market Pulse

The dollar down amid improved risk sentiment

7 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed 0.06% lower and continues to face challenges for upside traction during the early hours of Tuesday. In the absence of significant data releases, the greenback gauge follows U.S. Treasury yields, which marked a 1.7 basis points (bps) decline on Monday, to print recent losses. Furthermore, improving risk sentiment as a result of the Omicron variant's restrictions relaxing decreased demand for safe-haven currencies. On the other hand, robust online U.S. retail sales over the Christmas season, as well as the jump in two-year U.S. treasury bonds to March 2020 levels, bolstered the dollar and limited losses. Following that, after resetting the record on Monday, the S&P 500 Futures show minor losses on Tuesday. Coming up, traders may be entertained by U.S. housing and Richmond Fed Manufacturing statistics, while news about Omicron and other risk catalysts may provide further guidance.


The Euro closed 0.09% higher against the U.S. dollar, although it slowed down and witnessed a modest downward movement. On Tuesday, Euro remained confined in a three-day-old trading range through the early European session. The recent weakening of the Euro might be linked to a strong U.S. two-year Treasury yield, as the U.S. dollar followed the short-term bond coupons to recover. Furthermore, an 8.5% increase in U.S. retail sales during the holiday season, combined with comments from U.S. Vice President Kamala Harris suggesting the use of her tie-breaking vote to pass President Joe Biden's Build Back Better (BBB) stimulus plan favored the U.S. dollar bulls and weighed on the Euro. Following that, positive sentiment around Omicron, as well as a lack of key data releases, are anticipated to work against the Euro as the year draws to a close. Moving on, traders will see wider market movements to give a fresh direction to the Euro. 


The Sterling closed 0.37% higher and continues to hold its upward traction during Tuesday's early trading session. The British pound maintained its recent gains on Tuesday, hitting a five-week high and trading around those levels with minor gains/losses. Sliding U.S. Treasury bond rates and further encouraging news about the Omicron model underpinned the British pound, although thin liquidity conditions in the UK owing to the bank holiday worked as a headwind to limit further gain. Additionally,  Sajid Javid, the UK health secretary, has said that no new limits would be implemented in England before the New Year. This contributed to reports that the new strain may be less severe than the previous Delta version, as well as UK research suggesting Omicron infections are less likely to result in hospitalization. The pound is also supported by new post-Brexit fishing laws and the pledge of £75 million in investment for British ports and processing facilities. Looking forward, Traders expect broader market sentiments and Brexit-related developments to provide impetus to Sterling. 


The Japanese Yen closed 0.42% lower versus the U.S. dollar and extended its downward momentum when heading into Tuesday's morning session. The Japanese yen slipped against the U.S. dollar as safe-haven currencies lost popularity amid increasing risk appetite. Furthermore, the Bank of Japan (BoJ) indicated that it would be slow to reduce monetary support compared to other central banks. Despite greater input prices, inflation remained low because businesses were hesitant to pass on additional costs to consumers. Prime Minister Fumio Kishida expressed his wish for supporting monetary and fiscal policies last week, saying that he hoped the BoJ would continue to make efforts to attain its 2% annualized inflation objective. Elsewhere, industrial production in Japan jumped by a record-high 7.2% Monthly in November 2021, beating market estimates for a 4.8% growth as production in the auto sector benefited from a global parts supply recovery. Moving ahead, the Yen will follow broader market sentiments and U.S. data release for further price movement. 


The Loonie closed 0.17% higher against the greenback and continues to strengthen further during Tuesday morning. This comes as WTI crude oil prices remain stable at the monthly high, slightly below $76.00/barrel, despite expectations that the Omicron variant would have an effect on fuel demand. Additionally, retreating of U.S. Treasury bond yields reduced the demand for the greenback, keeping the U.S. dollar bulls on the defensive. Furthermore, year-end limited liquidity may deter traders from making strong directional bets on the dollar, favoring the Loonie. Following that, a bank holiday in Canada and a relatively lighter U.S. economic data release will further direct the Loonie prices. 


The Mexican peso finished 0.35% lower against the U.S. dollar and continued its downward trend during Tuesday’s morning session. After reaching a six-week high, the Mexican peso trading lost its momentum against the U.S. dollar towards the end of December. Meanwhile, Mexico's economic activity contracted by 0.7% year over year in October 2021, after a 0.9% growth the month before. As the nation battles to recover from the third quarter pandemic-induced slowdown, the services sector re-entered contractionary territory. Increasing oil prices, on the other hand, helped to buffer additional losses. Crude oil prices, a key Mexican export, continued their current surge to above $75 per barrel, up more than 9% from their previous low. Also, in its most recent meeting, the Banxico stunned the markets by raising rates by 50 basis points to 5.5%, above market estimates of 25 basis points, citing a worsening of the inflation risk balance.


The Chinese Yuan closed down marginally against the U.S. dollar. In holiday-thinned trading on Tuesday, the onshore Yuan remained unchanged against the U.S. dollar as investors kept to familiar levels in the last week of 2021. Meanwhile, as demand for liquidity surged before the end of the year, the People's Bank of China (PBOC) injected a total of CNY 200 billion into the country's financial system on Tuesday, offsetting the CNY 10 billion in such loans that were slated to expire on the same day. With a rate of 2.20%, it is the largest single-day injection in two months. Elsewhere, the Shanghai Composite Index increased 0.39% and the Shenzhen Component Index rose 0.83% on Tuesday as advances in new energy companies and non-ferrous metal stocks offset losses in the energy sector, although growing Covid cases in the country dampened the mood. 


The Brazilian Real closed 0.62% higher against the greenback in Monday’s session.  The dollar has gained 8.70% versus the Brazilian currency this year. Concerns about the Omicron version of the coronavirus have remained high among global investors, who are also concerned about the prospect of greater inflation and a concomitant tightening of monetary policy. On the domestic front, experts lowered their inflation projection for 2021 and predicted slower growth in Brazil's Gross Domestic Product (GDP) for the year. The projection for inflation for 2021 dropped from 10.04% to 10.02%, while the GDP forecast for this year's increase went from 4.51% to 4.58%. Elsewhere, the main Sao Paulo stock index, Bovespa, rose 0.6% on Monday, snapping two negative sessions and tracking its international peers as investors returned to positive sentiment after an extended Christmas break with studies showing that the new variant is less severe than previous strains.


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