- The US Dollar sees earlier gains evaporate ahead of US trading session on Friday.
- The Greenback undergoes some profit taking after its steep rally earlier this week.
- The US Dollar Index (DXY) trades below 107.00 under pressure from some profit taking.
The US Dollar (USD) is seeing its gains from this week partially being erased on Friday ahead of the US trading session. Some profit taking is happening just before the weekend after the Greenback received some inflow on the back of a weaker Euro and a weaker Yuan. The release of the Import and Export data this Friday did not really help with all numbers falling roughly flat.
The USD got a boost on Thursday after Producer Price Index (PPI) data for November came well above expectations. While the data failed to change the broader view that the US Federal Reserve (Fed) will cut interest rates by 25 basis points next week, it did pare some bets of further cuts in 2025.
The Greenback was also supported by expectations of further stimulus elsewhere. In Europe, the European Central Bank (ECB) President Christine Lagarde admitted that a 50 basis point rate cut scenario was on the table. However, the Governing Council agreed that a 25 basis point rate cut was more appropriate.
In China, recent news also signaled bolder economic support in 2025. The Politburo, led by President Xi Jinping, vowed to embrace a “moderately loose” monetary policy in 2025 and a “more proactive” fiscal policy. In response, bond prices have soared and China’s 10-year bond yields fell to a record low of 1.77%, Bloomberg reports.
Daily digest market movers: No surprise there in Import and Export
- China’s top leaders and policymakers are considering allowing the yuan to weaken in 2025, Reuters reports. Several analysts are seeing the risk that China is heading towards a Japan scenario, where bond yields could fall further, Bloomberg reports.
- The Import-Export Price Index for November did not really move the neeedle. The monthly Export Index fell to 0% after expanding in October by 1%. The Import Index remained at 0.1%, similar as in October.
- Equities are very geographically divided this Friday. In Asia, all major Chinese and Japanese indices are in red territory. Meanwhile, in Europe and in the US, the major indices are seeing green numbers.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 96.4%.
- The US 10-year benchmark rate trades at 4.35%, a fresh high for this week.
US Dollar Index Technical Analysis: Sound profit taking
The US Dollar Index (DXY) is being fueled for another rally thanks to the move in bond markets this week. After the ECB already widened the rate differential gap between the US and Europe, prospects of further easing in China add to that gapthis Friday China is adding to that gap. WiIth the plunge in Chinese yields, the gap between the US and China is getting wider, fueling which fuels a stronger US Dollar.
The 107.00 got broken this Friday, but and needs to see a daily close above it, to actbe acting as support from; now on. Very close, by there is the 107.35 (October 3, 2023, high) level that might act as a brief resistance. Further up, the high of November 22 at 108.7 emerges.
Looking down, 106.52 is now the new first supportive level to look for in case ofif any profit taking should occur. Next in line is the pivotal level at 105.53 (April 11 high) that comes into play before heading into the 104-region. Should the DXY fall all the way towards 104.00, the 200-day Simple Moving Average at 104.17 should catch any falling knife formation.
US Dollar Index: Daily Chart
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as 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 FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” 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 crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
Source: https://www.fxstreet.com/news/us-dollar-falls-flat-possible-sixth-straight-trading-day-with-gains-202412131237