Key points:

  • The US dollar strengthened against major currencies on Wednesday, supported by higher US Treasury yields;
  • The dollar index, which tracks the currency against six major peers, rose 0.86% to 102.18, its highest since Dec. 13.
  • Investors are awaiting important US economic reports on Wednesday, including minutes from the December Fed meeting, US jobs data for November and manufacturing survey data.

The dollar held steady near a two-week high on Wednesday, buoyed by rising U.S. Treasury yields and a subdued trading environment.

The euro, which tumbled 0.95% on Tuesday, its sharpest daily decline since July, inched up 0.12% to $1.0954.

The dollar index, which measures the currency against six major peers, edged up slightly to 102.18, retaining nearly all of its 0.86% gain from the previous day.

The muted trading activity was attributed to the closure of Japanese markets for holidays and anticipation of key U.S. economic data, including the Federal Open Market Committee’s (FOMC) December meeting minutes.

A surge in risk aversion towards the end of last year, driven by declining inflation and a more dovish tone from the Federal Reserve at its December meeting, triggered expectations of a U.S. interest rate cut in 2024, sending the dollar plummeting and sparking a rally in Treasury bonds and stocks.

Last week, the dollar index reached a five-month low of 100.61. However, this optimism did not extend into the new year.

The S&P 500 and Nasdaq Composite indices opened the year on a sour note, closing lower due to the weakness of tech giants. Simultaneously, Treasury yields surged as bond prices fell, making U.S. debt more attractive and boosting the dollar.

The dollar strengthened against the Japanese yen, rising 0.43% to 142.57 per dollar, adding to its 0.82% gain on the previous day.

Waiting for the Fed protocol

Market participants will closely examine the Federal Open Market Committee (FOMC) minutes from its December meeting, scheduled for release at 19:00 GMT, seeking clues regarding the extent to which the central bank could lower interest rates this year.

Additionally, the release of November U.S. employment data and manufacturing survey figures could influence market sentiment.

The New Zealand dollar, frequently employed as an indicator of risk appetite, edged up 0.11% to $0.6259 after slumping to a two-week low of $0.6246 earlier on Wednesday.

The UK pound gained 0.21% to $1.2646 after declining 0.87% in the previous session, its sharpest daily decrease in almost three months.

Analysts attributed the risk-averse sentiment partly to concerns about escalating geopolitical tensions in the Middle East.