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The U.S. dollar started the week on a softer note, retreating from its recent highs as traders await Donald Trump’s inauguration and the accompanying policy announcements. Light trading volumes, driven by the Martin Luther King Jr. Day holiday in the U.S., contributed to subdued activity.
Dollar Index Drops
- The Dollar Index (DXY), which measures the greenback against six major currencies, fell by 0.3% to 108.925, easing off its two-year high from last week.
- The dollar has gained approximately 4% since November, driven by expectations of inflationary policies under Trump’s administration that could lead to sustained higher interest rates.
Euro and Sterling
- EUR/USD: The euro rose 0.3% to 1.0313, recovering slightly from its two-year low last week.
- European markets remain wary of a potential trade war, with ECB member Isabel Schnabel recently suggesting that trade conflicts are “very likely.”
- German producer prices for December grew 0.8% YoY, falling short of the 1.1% forecast, highlighting subdued inflationary pressures in Europe.
- GBP/USD: The pound edged up 0.1% to 1.2193, though it remains down nearly 3% over the past month.
- Weak UK economic data and expectations of further rate cuts by the Bank of England (BoE) have weighed on sterling.
- The BoE has already cut rates twice in 2024 and is likely to announce another reduction at its February policy meeting.
Yen and Asian Currencies
- USD/JPY: The yen strengthened slightly, with USD/JPY falling 0.1% to 156.19, as markets anticipate an interest rate hike from the Bank of Japan (BoJ) during its policy meeting later this week.
- The BoJ’s decision will hinge on market stability following Trump’s inauguration.
- USD/CNY: The yuan gained, with USD/CNY slipping 0.2% to 7.3143.
- The People’s Bank of China (PBoC) maintained its one-year loan prime rate at 3.1% and the five-year rate at 3.60%, signaling support for the economy and a stabilizing yuan.
Global Interest Rate Policies and Outlook
- ECB and Eurozone: With eurozone inflation near its 2% target, the European Central Bank is expected to continue its rate-cutting cycle, having already reduced rates four times since mid-2024.
- BoE and UK: Further easing by the Bank of England is anticipated as economic data point to ongoing challenges.
- BoJ and Japan: The Bank of Japan’s potential rate hike would mark a significant policy shift, adding strength to the yen.
Market Sentiment
Investors are closely watching Donald Trump’s return to the White House and the policies that will accompany his second term. While his expected inflationary measures have supported the dollar in recent months, uncertainty surrounding trade tariffs and global central bank actions continues to drive currency market fluctuations.
This week’s focus will remain on Trump’s inauguration, central bank meetings, and potential shifts in trade and monetary policies across key economies.
