The US dollar weakened against major trading partners early Monday as markets returned to normal activity following two holiday weeks. Analysts, including ING’s Francesco Pesole, suggested that the dollar’s momentum might wane as market conditions stabilize and reconcile with slightly lower interest rates.
However, the upcoming inauguration of Donald Trump and the Federal Reserve’s hawkish stance may limit any substantial correction in the dollar. Fed Governor Adriana Kugler stated on Saturday that the Federal Open Market Committee’s (FOMC) efforts to curb inflation are ongoing, while San Francisco Fed President Mary Daly described inflation as still “uncomfortably” above target. This indicates that rate cuts in 2025 may be approached cautiously.
A summary of Monday’s foreign exchange activity showed mixed movements:
- USDEUR: Rose to 1.0422 from 1.0307 at Friday’s close and 1.0296 earlier Friday. Eurozone services PMI exceeded expectations in December, returning to expansion. However, investor confidence dipped in January. The European Central Bank’s next meeting is on Jan. 30.
- GBPUSD: Increased to 1.2542 from 1.2425 at Friday’s close and 1.2509 earlier Friday. UK services PMI grew slower than anticipated but still expanded. UK car registrations declined in December. The Bank of England meets on Feb. 6.
- USDJPY: Fell to 157.0751 from 157.3612 at Friday’s close and 157.1030 earlier Friday. Japan’s services PMI showed modest expansion in December. The Bank of Japan’s meeting is scheduled for Jan. 23-24.
- USDCAD: Declined to 1.4314 from 1.4444 at Friday’s close and 1.4400 earlier Friday. No major Canadian data was released on Monday. The Bank of Canada’s next meeting is on Jan. 29. Reports indicate Canadian Prime Minister Trudeau may resign soon, though the impact on CAD is minimal.
Analysts expect improved foreign exchange liquidity this week as normal market conditions resume. While technical indicators suggest the dollar’s recent rally may be overdone, the proximity to Trump’s inauguration and the Fed’s firm stance are likely to maintain a defensive position on the greenback. Historically, January and February have been seasonally strong months for the dollar.
