Written by Dollar comes under renewed selling pressure
The US dollar fell against all but one of the other major currencies on Thursday, with the only exception being the yen. Today, although it is stabilizing against most of its peers, it is extending its slide versus the aussie.
With no clear catalyst to drive the dollar lower, news media are attributing the dollar weakness to the revival of risk-appetite following the de-escalation of Trump’s rhetoric regarding Greenland and potential tariffs on several European nations.
Having said that though, the escalation itself was the reason for the dollar falling on Monday. The greenback rebounded somewhat after Trump toned down his words, ruling out military operations and announcing a framework of a deal with NATO allies, but it resumed its slide quickly. This suggests that traders were already leaning towards selling the dollar or reducing their long exposure.
The slide was not a result of increasing Fed rate-cut bets either as due to yesterday’s PCE data pointing to further stickiness in US inflation during November, investors are now penciling in 44bps worth of rate cuts by the end of this year. Ahead of the data, they were expecting around 50.
One simple explanation may be that market participants sought better alternatives, like buying more equities after the easing of tensions regarding Greenland, and in the FX market, preferring the aussie, which accelerated its rally after Australia’s better-than-expected report increased the probability of a rate hike at the RBA’s upcoming gathering.
BoJ holds borrowing costs steady, yen spikes up on potential intervention
The only currency against which the dollar gained ground was the yen, with dollar/yen spiking higher after the BoJ kept interest rates unchanged. The decision was widely anticipated, though one member voted for a 25bps rate hike. In the statement, it was clear that policymakers remain willing to continue raising interest rates as long as economic activity and inflation increase in line with their forecasts. The Bank upgraded its growth and inflation forecasts for fiscal 2025 and 2026.
Once again, the outcome was not as hawkish as the market expected, with Ueda appearing at the press conference in no rush to get to the next rate hike. What’s more, with the Bank reiterating that they will continue raising rates as long as their projections are met, upgrading those projections is also raising the bar for the next rate hike. Anything short of those projections may be a reason for further delay. What’s more, the decision came just hours after data showed that Japan’s headline inflation slowed to a near four-year low in December, which makes it hard for the market to be convinced about an imminent hike.
Having said all that though, the yen surged around 190 pips against the dollar during the European morning, with the move looking similar to the rate-check calls that preceded the actual intervention episodes back in 2024. Maybe the ministry of finance made the call after the BoJ decision failed to stop the yen’s bleeding. Such calls are probably meant to give traders a stronger warning before authorities proceed with bolder action.
Therefore, if traders are not willing to stop selling the yen any time soon, a stronger episode may be looming. This means that although the uptrend in dollar/yen appears to have remained intact, riding it now could prove an unwise choice.
Stocks continue to recover, gold rallies to new highs
On Wall Street, all three of its main indices continued climbing higher on Thursday, with futures today suggesting some stabilization. Investors decided to increase their risk exposure after Trump’s walk-back of Greenland-related threats, which suggests that they are not concerned about elevated valuations yet.
Perhaps they are interpreting stretched valuations as present values of future growth opportunities rather than expensiveness. Next week, several tech giants will report their earnings and should the results satisfy market expectations, the uptrends in US stock indices are likely to continue.
Gold remained strong, despite the broader boost in risk appetite, hitting a new record high of $4,967, before pulling somewhat back. Once again, this suggests that there are other forces driving gold up, besides safe-haven flows, like central bank buying and expectations of more rate cuts by the Fed, which reduce the opportunity cost for holding the metal. The dollar’s tumble may have also been a helping hand.
by XM.com
