- The US dollar rose for the fifth day in a row against almost all of its major G20 counterparts.
- Markets are spooked by the idea that Fed policy in 2025 may be more restrictive than expected.
- The US Dollar Index (DXY) rose to 110.00, looking to consolidate at these higher levels.
The US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, rose for the fifth day in a row and is trading at levels not seen since November 2022 as traders weigh their expectations for the 2025 federal funds rate. The move comes after markets followed the non-farm payrolls report The latest for December, released on Friday, has been revised to align with the new narrative that the Federal Reserve (Fed) will be more restrictive and keep interest rates steady for longer, with opportunities for several rates. The benefit of the cuts in 2025 is diminishing.
The US economic calendar is fairly quiet in the lead-up to the Consumer Price Index (CPI) release on Wednesday and retail sales on Thursday. Monday will at least get off to a very quiet start, with a few junior bond auctions on the agenda. Meanwhile, traders can evaluate their next moves ahead of President-elect Donald Trump’s inauguration next week.
Daily summary of market drivers: Stocks decline
- At 16:30 GMT, the US Treasury will issue a 3-month and 6-month bill.
- At 19:00 GMT, the budget statement for December will be released. The deficit is expected to shrink to $62 billion from $367 billion.
- Shares fell, dragged down by the selling in Nvidia shares. The defeat comes after several major companies such as Microsoft canceled their large orders for Nvidia’s latest chipset server racks.
- The CME FedWatch forecasts a 97.3% chance of keeping interest rates unchanged at current levels at the January meeting. Expectations are that the Federal Reserve (Fed) will remain data-reliant given the uncertainty that could impact the path of inflation once President-elect Donald Trump takes office on January 20.
- US yields are falling slightly. The 10-year benchmark reached 4.770%, down from a nine-month high of 4.798% seen in Asian trading on Monday.
US Dollar Index Technical Analysis: Safe Haven Flow
The US Dollar Index (DXY) is present in the last seven days before President-elect Donald Trump takes office. With market rhetoric shifting toward a longer, more restrictive Fed monetary policy going forward, the chances of the Fed not cutting interest rates at all in 2025 could be very reasonable. In this case, the consequences for the dollar will be that the US dollar index will rise further.
On the upside, the psychological barrier at 110.00 should be maintained, and consolidation should be seen above it for the rally to move higher. With further upside, 110.79 remains the next big upside to reach. Once above that level, it extends all the way to 113.91, the double top as of October 2022.
On the downside, the first bearish barrier is 107.35, which has now turned into support. The next level that could stop any selling pressure is 106.52, with the 55-day simple moving average (SMA) consolidating at 106.83 above this support area.
US Dollar Index: daily chart
Frequently asked questions about risk sentiment
In the world of financial terminology, the two widely used terms “risk” and “risk aversion” refer to the level of risk that investors are willing to take over the indicated period. In a “risk” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk off” market, investors begin to “play it safe” because they are concerned about the future, and therefore buy less risky assets that are sure to bring a return, even if it is relatively modest.
Typically, during periods of “risk on”, stock markets rise, and most commodities – with the exception of gold – will also rise in value because they benefit from positive growth expectations. The currencies of countries exporting heavy goods are strengthening due to increased demand, and cryptocurrencies are rising. In a “risk off” market, bonds – especially major government bonds – rise, gold shines, and safe-haven currencies like the Japanese yen, Swiss franc and US dollar all benefit.
The Australian dollar (AUD), the Canadian dollar (CAD), the New Zealand dollar (NZD) and minor foreign currencies such as the ruble (RUB) and the South African rand (ZAR) all tend to appreciate in markets that are “risk on”. Currencies depend heavily on commodity exports for growth, and commodities tend to rise in prices during periods of risk because investors expect increased demand for raw materials in the future due to increased economic activity.
The major currencies that tend to rise during “risk off” periods are the US Dollar (USD), the Japanese Yen (JPY), and the Swiss Franc (CHF). The US dollar, because it is the world’s reserve currency, and because in times of crises investors buy US government debt, which is considered safe because the world’s largest economy is unlikely to default. The reason for the yen is the increased demand for Japanese government bonds, because a high percentage of them are held by domestic investors who are unlikely to get rid of them – even in a crisis. The Swiss franc, because strict Swiss banking laws provide investors with enhanced capital protection.