- The US Dollar does not enjoy safe-haven inflows seen on Monday on AI valuation concerns.
- US President Trump threatened to slap 50% tariffs on Colombia imports in a deportation spat.
- The US Dollar Index (DXY) sinks below 108.00 and flirts with a break below 107.00.
The US Dollar Index (DXY), which tracks the performance of the US Dollar against six different major currencies, edges slightly lower and trades around 107.30 at the time of writing on Monday despite some earlier safe-have inflows during the Asian session. Markets got spooked after United States (US) President Donald Trump threatened to slap 50% tariffs on Colombian imports after the country refused to take in deported immigrants from the US during the weekend. Traders now reassess their earlier dovish stance on tariffs as it seems clear they will be used more heavily as a leverage tool.
On the economic data front, all eyes are on the US Federal Reserve (Fed) and the European Central Bank (ECB), which will announce their first monetary policy decisions this year on Wednesday and Thursday, respectively. While the ECB is set to deliver another 25 basis points (bps) rate cut, the Fed is expected to keep borrowing costs unchanged. For this Monday, the Chicago Fed National Activity Index for December is the main data point to focus on.
US equities are dipping lower with investors getting concerned on the valuation of AI tech stocks in the US. Deepseek, a Chinese startup launched an open-source AI module which good be a game changer for Nvidia and ASML. Tech stocks dip throughout Monday, draging the Nasdaq lower.
Daily digest market movers: Chicago Fed Activity up ahead
- At 13:30 GMT, the Chicago Fed National Activity Index for December is due. The previous reading was at -0.12, with no forecast available.
- At 15:00 GMT, New Home Sales data for December is due, with expectations for a jump in sales to 0.67 million units from 0.664 million in November.
- The US Treasury will have its work cut out for this Monday with two auction moments due:
- at 16:30 GMT, short-term 3-month and 6-month bills will be allocated.
- At 18:00 GMT, medium-term 2-year and 5-year notes are due for auction.
- Equities sink on Monday due to concerns over AI valuations and overestimated earnings in the tech sector. All European indices and US equity futures trade down over 1%.
- The CME FedWatch tool projects a 43.8% chance that interest rates will remain unchanged at current levels in the May meeting, suggesting a rate cut that month. Expectations are that the Federal Reserve (Fed) will remain data-dependent with uncertainties that could influence inflation during US President Donald Trump’s term.
- The US 10-year yield is trading around 4.538%, further away from its more-than-one-year high earlier this month at 4.807%.
US Dollar Index Technical Analysis: Next leg lower
The US Dollar Index (DXY) is overpassed in this Monday’s bid for a safe haven. Instead, investors are picking up more US bonds and the Japanese Yen (JPY). The latter is currently rallying over 1% against the US Dollar, weighting on the DXY as it accounts for 13.6% of weight. Expect volatile moves in the DXY by Wednesday during the Fed decision announcement.
There is a long road to recovery. First, the psychological level of 108.00 must be recovered. From there, 109.29 (July 14, 2022, high and rising trendline) is next to pare back last week’s losses. Further up, the next upside level to hit before advancing further remains at 110.79 (September 7, 2022, high).
On the downside, the convergence of the high of October 3, 2023, and the 55-day Simple Moving Average (SMA) around 107.56 should act as a double safety feature to support the DXY price. For now, that looks to be holding, though the Relative Strength Index (RSI) still has some room for the downside. Hence, rather look for 106.52 or even 105.89 as better levels for US Dollar bulls to engage and trigger a reversal.
US Dollar Index: Daily Chart
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.
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