Jan 2, 2024: The dollar initiated a climb on the first trading day of the year, gaining traction from elevated U.S. yields as attention shifted to forthcoming U.S. jobs figures and European inflation data this week, seen as potential indicators guiding central banks’ future actions.
The dollar index, gauging the U.S. currency against six key rivals, surged 0.67% to 102.05, marking its most substantial daily increase since October.
Throughout 2023, it had experienced a 2% decline, halting its two-year growth streak, influenced by the expectation among investors that the U.S. Federal Reserve might significantly reduce interest rates in a year when the economy remains robust.
In response to the dollar’s surge, the euro declined by 0.74% as traders processed data revealing the continued contraction of euro zone factory activity for the 18th consecutive month. Sterling also dipped by 0.64%, resting at $1.2657.
The dollar also strengthened against the Japanese yen, rising by 0.96% to 142.16 yen.
Supporting the dollar’s surge were climbing U.S. yields. The benchmark 10-year yield ascended by 10 basis points to 3.963%, marking its most significant daily uptick in over three weeks. This rebound follows a 100 basis point decline observed in November and December.
This week appears packed with economic data releases, encompassing European inflation figures and U.S. reports on job openings and non-farm payrolls. These data points are pivotal in shaping market sentiments regarding the next monetary policy moves by both the Fed and the European Central Bank.
Kenneth Broux, Senior Strategist FX and Rates at Societe Generale (OTC: SCGLY), highlighted the significance of primary corporate issuance and the upcoming FOMC minutes and payrolls reports in dictating market expectations for the Fed’s January and March meetings.
Scheduled for release on Wednesday, the FOMC minutes from the recent December meeting will offer further insights into the central bankers’ perspectives.
Market indications currently estimate an 82% likelihood of interest rate cuts by the Fed starting in March, according to the CME FedWatch tool, with an anticipation of over 150 basis points of easing throughout the year.
Meanwhile, traders grappled with rising oil prices, particularly Brent, which soared over 2% on fears of possible disruptions to Middle East supply after a recent attack on a container ship in the Red Sea. This scenario, however, failed to bolster currencies of oil-exporting nations against the strengthening greenback. The dollar gained 0.4% against the Norwegian crown and 0.2% against the Canadian dollar, while the Australian dollar dipped by 0.33%.