US dollar loses ground after Trump’s words
- Many investors lock in profits as trade tensions linger and bond markets pause on the holiday.
- Early signals from the incoming US administration suggest a methodical approach to tariffs and fiscal expansion.
- Upcoming data-dependent Federal Reserve decisions remain in focus with May seen as pivotal for any policy shifts.
The US Dollar is in choppy trading after President-elect Donald Trump’s inauguration. Trading floors in the US will remain closed due to Martin Luther King, Jr. Day, but the US Dollar Index (DXY) plunged toward 108.30 with uncertainty ahead as markets await further details on Trump’s economic plans.
Daily digest market movers: USD sees red on delayed tariff signals
- Policy changes hinge on discussions in Washington: According to multiple sources, the new administration will establish a taskforce to investigate potential tariff impacts on Canada, Mexico and China before implementing any broad measures.
- In fact, during his inaugural speech Donald Trump flirted with the idea of a tariff plan on the mentioned countries but with no specific details.
- Holiday closure slows market action with the US bond market shut down. The 10-year yield holds near 4.60%. Traders will keep watch on Tuesday for fresh signals regarding inflation concerns and interest rate moves.
- CME FedWatch Tool indicates that a hold is priced in for this month’s Federal Reserve meeting, and there are high odds of another hold in May.
DXY technical outlook: 20-day SMA cracks, downside risk builds
The US Dollar Index lost key traction below 109.00 as profit-taking and tempered bond yields took their toll. The breach of the 20-day Simple Moving Average (SMA) near 108.50 underscores rising vulnerability for the Greenback.
Should buying interest fail to emerge, the DXY’s broader uptrend could face a more pronounced setback. Nonetheless, expectations of continued US economic outperformance may eventually attract fresh bids, keeping markets on alert for any policy-driven reversals.
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.