Dollar Declines But Hours Later Part of Move Undone

The beginning of the Trump presidency has led to notable shifts in the financial markets, highlighting increased volatility as the new U.S. administration begins to implement its policies. At first, the markets responded positively when Trump refrained from immediately imposing tariffs on China and Europe. However, shortly after, the dollar experienced a decline.

Despite the initial downturn, part of this decline was reversed within hours, primarily due to the administration’s ongoing discussions about implementing 25% tariffs on imports from Canada and Mexico. This approach appears to be more about supporting the domestic agenda focused on border protection rather than directly targeting the trade policy involving foreign nations.

The administration’s priorities are seen to lie initially with domestic issues such as border security, migration, energy, and deregulation. In terms of trade relationships, a ‘carrot-and-stick’ strategy seems to be in play. For instance, TikTok has been given a 75-day period to find a U.S. partner, which may allow both nations to readjust their trade strategies. Similarly, a review of trade relations with Europe may be forthcoming, with discussions likely revolving around Europe increasing its purchase of American energy as part of these negotiations.

As these changes unfold, we can expect ongoing volatility in the markets, similar to what was observed in the past 24 hours. The trading patterns of the dollar and interest rates may settle into broader sideways ranges during this period of adjustment.

Focusing on recent market reactions, U.S. yields have dipped, with the 2-year yields falling by 4.5 basis points and the 5 and 10-year yields decreasing by 7.5 basis points. With the Federal Reserve currently in its blackout period, this gives them extra time to prepare for their meeting scheduled for January 29. The 2-year U.S. yield is testing support around the 4.20% mark, while further declines may still find solid support at the December low of 4.08%.

The initial indications on the dollar are somewhat mixed. The absence of immediate aggressive import tariffs led to a decline, but this was partially offset by news regarding Canada and Mexico. As the new administration continues to assess potential currency manipulation, this could create a ceiling on any significant gains for the dollar in the short term. Nonetheless, the looming tariff threats may also provide a foundational support level for the dollar. A notable development has been a sharp recovery of the yuan, which adds to the complexity of the situation.

For the EUR/USD pair, the dynamics resemble those of the U.S. 2-year yield. The dollar tested initial support near the EUR/USD level of 1.0428. Even if a further correction occurs, breaking above the early December high of 1.0630 may prove challenging.

Recent News & Insights

In December, new car registrations in the European Union rose by 5.1% year-over-year, largely driven by a significant increase in Spain, which saw registrations jump by 28.8%. France experienced modest growth of 1.5%, while Germany and Italy reported declines. This trend of mixed results is anticipated to continue into 2024, with a slight overall increase in registrations of 0.8%, but with varying performances across key markets such as Spain, Italy, Germany, and France.

Looking specifically at Belgium, new car registrations fell by 8.9% year-over-year in December, totaling 23.4k. Over the full year of 2024, there was a 6% decrease in registrations, amounting to 448k, with petrol cars dominating at 41.7% of registrations, followed by battery electrics at 28.5%.

Turning to the economic landscape in Canada, the Bank of Canada’s Business Outlook Survey for the fourth quarter of 2024 indicates continued subdued business sentiment. However, firms are starting to anticipate positive changes in sales activity, encouraged by recent and expected interest rate cuts. Many businesses express plans to increase investments, though hiring intentions remain modest. Additionally, expectations regarding inflation have gradually returned to historical norms, despite ongoing concerns about high prices and cost increases stemming from trade tensions.

This information serves to provide a snapshot of current market and economic conditions, reflecting both opportunities and challenges as the new administration's policies unfold.

Dollar, Market, Volatility