Will the Rise of the Dollar Continue? Strong Data and Global Uncertainties Set the Direction
Price movements in the US dollar last week are being viewed as an early warning sign of a potential end to the current uptrend. Experts indicate that the dollar needs to rise above the two-year high of 109.54 to alleviate peak fears.
Last week, the US dollar index (DXY) managed to break the 108.962 level, which is the 61.8% Fibonacci retracement level of the drop from 114.78 to 99.549 during the 2022-2023 period, but it was unable to close above this level. This situation is indicative of a market movement referred to as a “bull trap,” where even if the market breaks this level, it has moved back downward.
US data supports the dollar. This week, the dollar continued to rise due to strong US economic data. According to the data released on Tuesday, job openings in the US increased more than expected in November, and layoffs remained at low levels. Additionally, activity in the services sector accelerated in December, reaching the highest input prices in the last two years. This brings warnings that inflation may rise again.
The bond markets also saw movement, with the 10-year treasury yields rising more than 8 basis points to reach 4.699%, the highest level in the last eight months. Experts express that this situation creates an environment in which the US Federal Reserve may delay interest rate cuts or even consider new rate hikes.
Chinese yuan under pressure from trade tariff threats. The Chinese yuan has fallen to its lowest level in 16 months due to threats from US President-elect Donald Trump to increase trade tariffs. Derek Halpenny from MUFG Bank indicated that the yuan could weaken further. Halpenny noted that investors have positioned themselves against the likelihood of a sharp increase in tariffs following Trump taking office.
While the People's Bank of China is trying to resist the depreciation of the yuan by setting the daily reference rate at strong levels, it is expected that the dollar/yuan exchange rate will gradually move towards the 7.5000 level. On Tuesday, the rate climbed to 7.3318, and analysts suggest that this movement could continue.
Euro and yen under pressure. The euro has fallen to its lowest level against the dollar in two years, touching 1.0224, and is currently trading at 1.0323. Expectations of interest rate cuts from the European Central Bank (ECB) are increasing pressure on the euro. Jane Foley from Rabobank stated that the lack of leadership in Europe, particularly due to expected tariffs from the Trump administration and uncertainties surrounding NATO, has discouraged euro investors.
The Japanese yen has also declined against the dollar, reaching a six-month low of 158.42. The drop in consumer confidence in Japan in December raises concerns that the Bank of Japan may not find sufficient justification for a rate hike. This situation continues to cause the yen to depreciate against the dollar.
Will the dollar’s rise continue? The dollar index is rising, testing the two-year high of 109.58 again. However, analysts say that without a close above this level, it will be difficult to determine whether the dollar's uptrend continues. This week’s upcoming data on the US labor market and expected policies from the Trump administration will play a critical role in determining the dollar's direction.