Surging risk appetite triggered US dollar’s recent weekly decline

The US dollar closed the week’s trading with a -0.30% decline, attributed to a surge in risk appetite. Treasury yields rose amid the Federal Reserve’s cautious approach to rate cuts and inflation data. The dollar’s strength is attributed to persistent inflation concerns, despite global market trends.

The US Dollar Index showed its initial weekly decline in 2024, trading at 103.77, down 0.08%, earlier on Friday. This downturn, amounting to around a 0.30% fall for the week, marks a shift from the consistent uptrend observed over the past two months, driven by diminishing expectations of imminent Federal Reserve rate reductions.

Despite recent robust economic indicators and Federal Reserve officials emphasizing the ongoing battle against inflation, the market consensus appears to have adjusted to a later timeline for rate cuts, potentially around June or beyond. Investor sentiment has somewhat disregarded the recent uptick in Treasury yields and the Federal Reserve’s slightly hawkish tone. The yield on the 10-year Treasury has risen to 4.333%, and the 2-year Treasury yield has increased to 4.728%.

January’s higher-than-anticipated consumer and producer price index figures have intensified worries about the persistence of inflation, contributing to the dollar maintaining its strength. Investors anticipate a more measured approach to rate reductions by the Fed, focusing instead on data-driven strategies.

The current correction in the dollar’s value is partly due to a surge in risk appetite, as the US currency typically functions as a safe-haven asset. Global shares have seen significant growth, partly fueled by positive earnings reports from major companies like Nvidia. The yen has been the weakest G10 currency this year, primarily due to its near-zero interest rates and the market’s preference for higher yields in other currencies.