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The US dollar observed a notable uptick on the inaugural trading day of this year, buoyed by ascending US yields, as investors eagerly anticipate US employment figures and European inflation statistics for guidance on central banks' forthcoming strategies.
Dollar Index Experiences a Rise
The US dollar index, a measure of the US currency against a basket of six others, surged by 0.7%. This puts it on the trajectory for its most substantial daily percentage hike since October.
However, it experienced a 2% drop in 2023, breaking a two-year gain streak. This was primarily due to investor sentiment that the US Federal Reserve (Fed) would implement significant rate cuts this year while the economy continues to prove strong.
Positive Contributors to Dollar's Gains
Fuel for the dollar's ascent included an increase in US yields. Benchmark 10-year notes climbed 7.1 basis points to rest at 3.931%, setting their sights on their largest daily upswing in over three weeks.
Despite the pressure on the dollar last month following indications of a rate cut by the Fed in 2024, Win Thin, the global head of currency strategy at Brown Brothers Harriman & Co, noted that "markets are beginning to understand that the US economy continues to demonstrate strength" and will likely continue this positive trend this year.
However, Thin conjectures that should a "soft landing" eventuate, it could mean 2-3 insurance cuts in 2024. The market currently anticipates six rate cuts in the current year. Until these expectations realign, the dollar may possibly remain "under duress and at risk," according to Thin.
Implications for Other Currencies
Worth noting, the rise of the dollar has impacted the euro, which saw a decline of 0.8% to $1.0956. Traders factored in data that showed a contraction of factory activity in the euro zone for the 18th consecutive month in December. Also affected was the sterling, which presently trades at $1.262, marking a 0.81% decrease on the day.
The Japanese yen also saw a reduction of 0.56% against the dollar, with the exchange rate at 141.66 yen per dollar.
What's in Store for Investors?
Investors can anticipate a busy week ahead with an array of economic data such as European inflation data and US statistics on job vacancies and non-agricultural payrolls. These will influence market expectations regarding monetary policy decisions by the Fed and European Central Bank.
In addition, the minutes from the Fed's latest Federal Open Market Committee meeting are set to be released on Wednesday, which should shed more light on the central bankers' thoughts.
The market currently estimates an 82% probability of interest rate reductions commencing from March, based on the CME FedWatch tool, with over 150 basis points of relaxation expected this year.
Furthermore, investors will also keep an eye on fluctuating oil prices amid concerns over potential interruptions to the Middle East's supply, following a recent attack on a container ship in the Red Sea.
Conversely, these concerns could not prevent currencies of oil-exporting countries from succumbing to the strengthening dollar.
The Norwegian Krone saw a 1.4% decline against the dollar, while the Canadian dollar was down by 0.6%. The Australian dollar also slipped 0.44% against the greenback.
The world of cryptocurrencies also started off on a positive note, with Bitcoin witnessing a 3.25% rise after briefly hitting $45,912.48. Its highest level since April 2022 comes amid rising anticipation of the approval of exchange-traded spot Bitcoin funds by the U.S. Securities and Exchange Commission.
