The dollar sell-off reflected spillover effects from Japanese bond volatility and renewed sensitivity to financial risk, although a rebound in longer-term Japanese government bonds eased pressures. – With Trump meeting with EU leaders in Davos and signaling his willingness to compromise, geopolitical calm could provide modest support to the dollar, notes ING FX analyst Francisco Pisol.
The Davos talks may provide support to the dollar
“Yesterday’s dollar sell-off appears to reflect a mix of fallout from Japanese government bond volatility and concerns about Europeans reducing their holdings of Treasuries. Imported volatility from Japanese bonds has weighed on global fixed income across the board, but the currency market reaction has not been uniform. High bond yields – even when driven by foreign markets – tend to weigh on a currency when investors are already sensitive to that country’s financial sustainability.”
“Long-term Japanese bonds rebounded sharply overnight, raising one source of downside risk for the US dollar during today’s European-American session. Incidentally, S&P 500 futures rose 0.4% while European stocks appear to be struggling to recover.”
“Greenland will be the dominant theme today and there may be room for de-escalation, providing some support for the dollar. Trump meets with EU leaders in Davos today, and if the past year has shown anything, it is that face-to-face engagement tends to provide the best chance of easing tensions with the US president. Before leaving for Davos, Trump said: “Maybe we will be able to work something out.”
