Dollar’s Winning Streak Comes to an End
After eight consecutive weeks of gains, the dollar finally retreated on Monday, surrendering some of its recent gains. This sudden reversal can be attributed to the bond market’s positive reaction to President-elect Donald Trump’s choice of fund manager Scott Bessent as the new U.S. Treasury secretary.
Fiscal Discipline Restores Confidence
Bessent’s appointment was seen as a reassuring sign of fiscal discipline, leading to a decrease in yields on 10-year Treasuries. This, in turn, shaved off some of the dollar’s rate advantage, causing it to dip. The yields slipped to 4.343%, down from 4.412% on Friday.
Dollar’s Strength May Be Fleeting
While Bessent’s appointment may have brought some relief to the bond market, his support for a strong dollar and tariffs suggests that the dollar’s retreat might be short-lived. Many technical indicators have been flashing overbought signals, indicating that the dollar’s rise may have been overextended.
Markets Take a Breather
Geoff Yu, senior macro strategist at BNY, noted that markets have been pushing prices aggressively in one direction for three weeks, and it’s time for a correction. “Markets probably need to take a breather when it comes to their dollar positions,” Yu said.
Currency Markets React
The dollar index fell 0.8% to 107.22, down from its two-year peak of 108.090 on Friday. The greenback also dipped 0.2% against the Japanese yen to 154.52, and the euro edged up 0.3% to $1.0452.
Rate Outlooks Diverge
The European manufacturing surveys showed broad weakness, while U.S. surveys surprised on the high side. This contrast led to a widening gap between European bond yields and Treasury yields, benefiting the dollar. Markets are now pricing in more aggressive easing from the European Central Bank, with the probability of a half-point rate cut in December rising to 59%.
Central Banks’ Rate Decisions
Futures have scaled back the chance of a quarter-point rate cut from the Federal Reserve in December to 56%, compared to 75% a month ago. Meanwhile, markets imply about 150 basis points of ECB easing by the end of next year, compared to around 70 basis points from the Fed.
Inflation Data Ahead
This week, figures on U.S. and EU inflation will be released, further refining the outlook for rates. Data on UK retail sales also disappointed, leading the market to price in more chance of a rate cut from the Bank of England, albeit in February rather than December.
Crypto Market Update
In the crypto world, bitcoin was trading at $98,308, off last week’s record top of $99,830. Bitcoin has climbed more than 40% since the U.S. election on expectations Trump will loosen the regulatory environment for cryptocurrencies.
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