U.S. Dollar Rises on Elevated Treasury Yields and Cautious Market Sentiment
The U.S. dollar continued its upward trajectory on Wednesday, following a significant jump the previous day. This rise can be attributed to the high U.S. Treasury yields and a cautious turn in the market, which weighed on Wall Street.
Trading remained relatively subdued as Japanese markets were closed for a holiday, and investors awaited important U.S. economic releases later in the day. This includes the minutes from the Federal Reserve’s December meeting.
The euro experienced a 0.2 percent decline against the dollar, reaching its lowest level since December 19. On Tuesday, it had fallen by 0.95 percent, marking its largest daily drop since July.
As a result, the dollar index, which tracks the currency against six major peers, increased by 0.22 percent to 102.47, building on Tuesday’s 0.86 percent rise.
In November and December, a drop in inflation and a dovish tilt in the Federal Reserve’s December policy meeting led to speculations of U.S. rate cuts in 2024. This caused the greenback to plummet and sparked a rally in Treasuries and stocks. The dollar index hit a five-month low of 100.61 last week.
However, these trends did not carry over into the New Year. On the first trading session of 2024, the S&P 500 and Nasdaq Composite closed lower, dragged down by major tech names. As prices fell, Treasury yields surged, making U.S. debt more appealing and propelling the dollar higher on Tuesday.
According to Alvin Tan, head of Asia FX strategy at RBC Capital Markets, the market’s view of imminent Fed cuts in the first quarter was unjustified. He believes that this reversal can continue for a while longer.
The greenback also saw a 0.61 percent increase against the Japanese yen, adding to the previous day’s 0.82 percent gain.
Investors are eagerly awaiting the release of the minutes from the Fed’s December meeting. This will provide insights into how many rate cuts the central bank plans to implement this year. Additionally, data on U.S. job openings for November and a survey-based gauge of the manufacturing sector could impact the markets.
As more people return to the market, the focus will shift towards data, according to RBC’s Tan.
The New Zealand dollar, often considered a proxy for risk appetite, experienced a 0.13 percent decrease, reaching $0.6244.
Sterling remained flat at $1.2622 after a sharp decline of 0.87 percent in the previous session, marking its largest daily fall in nearly three months.
Analysts believe that the risk-off sentiment is partly driven by concerns over escalating geopolitical tensions. This follows Israel’s drone strike in Lebanon’s capital Beirut, which resulted in the killing of Hamas deputy leader Saleh al-Arouri on Tuesday.
Ray Attrill, head of FX strategy at National Australia Bank, suggests that markets are finding it difficult to ignore geopolitics as they start the year.
By Harry Robertson and Rae Wee
