US Dollar Declines against Trading Partners as Rally Loses Steam
The US dollar fell against its major trading partners early Monday to start a return to a more normal schedule after two holiday weeks. The dollar could lose some momentum this week as a return of normal market conditions allows for some reconciliation with slightly lower rates, ING analyst Francesco Pesole said on Monday.
However, analysts added that the proximity to Trump’s inauguration and the strong underlying narrative of a hawkish Fed may well keep any USD correction short-lived.
Fed Governor Adriana Kugler said on Saturday that the Federal Open Market Committee’s efforts at fighting inflation are not yet done, while San Francisco Fed President Mary Daly said inflation remains “uncomfortably” above target, suggesting that the FOMC may take a more cautious approach to rate reductions in 2025.
A quick summary of foreign exchange activity heading into Monday showed that USDEUR rose to 1.0422 from 1.0307 at the Friday US close and 1.0296 at the same time Friday morning.
Eurozone services PMI rose more than expected in December to return to expansion, but investor confidence slipped modestly in January to a larger negative, according to data released earlier Monday. The next European Central Bank meeting is scheduled for Jan. 30.
GBPUSD rose to 1.2542 from 1.2425 at the Friday US close and 1.2509 at the same time Friday morning. UK services PMI rose less than expected in December but still indicated a faster pace of expansion, while UK car registrations declined in the same month, data released earlier Monday showed. The next Bank of England meeting is scheduled for Feb. 6.
USDJPY fell to 157.0751 from 157.3612 at the Friday US close and 157.1030 at the same time Friday morning. Japanese services PMI rose less than expected in December but still pointed to a modest expansion. The next Bank of Japan meeting is scheduled for Jan. 23-24.
USDCAD fell to 1.4314 from 1.4444 at the Friday US close and 1.4400 at the same time Friday morning. In Canada, Trudeau may resign soon, but CAD’s risks remain unchanged. There are no Canadian data on Monday’s schedule. The next Bank of Canada meeting is scheduled for Jan. 29.
Analyst said this week will see a return of normal market conditions and a pick-up in FX liquidity. That may lead to some softening in the dollar’s momentum, as the greenback could reconnect with the slight deterioration in its rate advantage over the holiday period.
But while technical factors signal that the dollar rally at the start of the year is overdone, the proximity to Donald Trump’s presidential inauguration should prevent a substantial rotation away from defensive dollar longs. Incidentally, January and February are two seasonally strong months for the dollar. Goldman Sachs, IFC Partner African Banks to Empower Women Entrepreneurs
