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The US dollar edged down on Monday, with the Dollar Index slipping 0.1% to 107.690 as of 09:55 GMT. Despite this minor dip, the dollar remains on track for a monthly gain of over 2%, bringing its year-to-date rise to nearly 7%.
Key Drivers Behind the Dollar’s Performance:
- Rising Treasury Yields: The dollar has benefited from surging US Treasury yields, with the 10-year yield hitting a seven-month high last week. However, yields eased slightly to 4.599% on Monday, contributing to the dollar’s retreat.
- Policy Impact of Donald Trump’s Election: The greenback has gained from expectations of growth-oriented policies, including tax cuts and tariff hikes, which could sustain inflation and limit the Federal Reserve’s pace of rate cuts.
- Federal Reserve Outlook: Markets currently anticipate just 35 basis points of rate cuts in 2025, following the central bank’s projection of two 25 bps cuts earlier this month.
Key Events Ahead:
Traders are closely watching weekly jobless claims on Thursday and the ISM Manufacturing PMI on Friday, alongside remarks from FOMC member Thomas Barkin.
EUR/USD Gains Slightly Amid Spanish Inflation Data
The EUR/USD pair rose 0.1% to 1.0439, bolstered by Spain’s annual EU-harmonized inflation rate increasing to 2.8% in December from 2.4% in November.
- The European Central Bank (ECB) recently cut interest rates and hinted at further easing. However, rising inflation in parts of the Eurozone, including Spain, could delay additional cuts.
- Eurozone annual inflation for November accelerated to 2.2%, exceeding the ECB’s 2% target rate, as noted by ECB Governing Council member Robert Holzmann.
GBP/USD Inches Higher Despite Weak Economic Outlook
The GBP/USD pair climbed 0.1% to 1.2595 in quiet trading ahead of Thursday’s manufacturing PMI data.
- The UK’s manufacturing sector is expected to remain in contraction, reflecting the broader economic stagnation after flat GDP growth in Q3.
- The Bank of England showed a dovish stance with a 6-3 vote to hold interest rates, signaling further rate cuts in 2025.
USD/JPY Remains Elevated, Intervention Risks Loom
The USD/JPY pair traded flat at 157.76, near five-month highs, as the yen remains weak. Intervention by Japanese authorities remains a risk, preventing the pair from testing the 160 level.
- The Bank of Japan (BOJ) recently held its policy rate steady at 0.25%, emphasizing a cautious approach to further rate hikes.
Chinese Yuan Weakens Further Amid Policy Concerns
The USD/CNY rose 0.2% to 7.3136, hovering near a one-year high as China’s fiscal expansion plans and looser monetary policy weigh on the yuan.
Investors will closely monitor upcoming US jobless data and PMI surveys to gauge further movements in the dollar and global currencies.
