The dollar remains stable as the risk rally pauses

Higher U.S. Treasury yields bolster the dollar, attracting investors for better returns. Cautious sentiment on Wall Street often steers investors towards safer assets like the dollar amid perceived risks elsewhere. Tracking global economic indicators and central bank actions provides insights into the dollar’s near-term trajectory.

With Japan observing a holiday, trading activity was subdued in Asia. The greenback slightly reduced its morning gains as the trading day progressed in the region.

The New Zealand dollar, seen as an indicator of risk appetite, rose 0.29% to $0.62695 after hitting a two-week low of $0.62485 earlier on Wednesday.

The Australian dollar also rebounded, increasing 0.09% to $0.6767, following a dip to a two-week low of $0.6756 earlier in the session.

However, against a basket of currencies, the greenback remained close to its two-week high of 102.25 reached on Tuesday, settling at 102.13 most recently.

The dollar index surged 0.86% on Tuesday, marking its most significant daily gain since March 2023.

The greenback faced pressure and Treasuries and stocks rallied at the end of last year due to increased risk appetite. This shift was driven by a more dovish stance from the Federal Reserve‚s December policy meeting, heightening expectations for U.S. rate cuts in 2024.

However, as the New Year began, a wave of risk aversion emerged, causing both the S&P 500 and Nasdaq Composite to close the first trading session of 2024 in the red, primarily due to declines in prominent tech stocks. [.N]

Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY) (NAB), commented, “We’ve just seen quite a significant reversal in risk sentiment. Higher U.S. yields, weaker U.S. stocks equals stronger dollar. I think that’s the simple story.”

“The kiwi dollar, which has been one of the more risk-sensitive currencies, has sort of underperformed versus most other currencies as well,” noted Attrill.

Meanwhile, the euro and sterling were recovering from significant declines, as both currencies recorded their most substantial daily losses in months on Tuesday.

The euro climbed 0.14% to $1.0955 following its 0.95% drop on Tuesday, marking its most substantial daily decrease since July of the previous year.

Sterling advanced 0.11% to $1.2633 after experiencing a 0.87% decline in the prior session, marking its most significant daily drop in nearly three months.

The greenback was supported by a resurgence in U.S. Treasury yields, with the benchmark 10-year yield reaching an over two-week peak in the prior session. [US/]

Cash trading of Treasuries in Asia was halted on Wednesday due to the holiday observed in Japan.

Elsewhere, the yen continued to weaken, dropping approximately 0.1% to 142.05 per dollar, following its nearly 0.8% decline in the prior session.

The risk-off sentiment was also influenced by rising geopolitical tensions following Israel’s drone strike in Beirut, Lebanon, targeting Hamas deputy leader Saleh al-Arouri on Tuesday.

“I suspect that markets (are) starting the year with finding it hard to completely ignore geopolitics,“ said NAB’s Attrill.

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