Dollar consolidates as American exceptionalism returns

Drivers: The US dollar is trading narrowly mixed against the G10 currencies. The market has an eye toward the US employment data, which often roils trading, due Friday. Indications suggest that the US Supreme Court may rule on the legality of the broad US tariffs imposed under emergency power legislation. Most seem to expect the high court to rule the tariffs exceed presidential powers and violates the “major questions” doctrine. To be sure, it will not end US efforts but likely redirect them through other legislation. Recall that there was a secondary market where some business reportedly sold the rights to a refund for 40-50 cents on the dollar. Meanwhile, while pundits may debate American exceptionalism, the US action in Venezuela and the exemption granted US companies from global agreement for a 15% minimum tax on corporate profits suggests some elements remain robust.

Prices

G10

The euro peaked yesterday near $1.1745, where the 20-day moving average was found and was sold to about $1.1685. It extended the losses today to slightly below $1.1675 but held above Monday’s low closer to $1.1660. Recall that the $1.1650 area corresponds to a retracement objective of the euro’s rally from late November. Options for 685 mln euros at $1.1725 expire today. 

The dollar remains in the range against the yen recorded on Monday (~JPY156.10-JPY157.30). It has traded between JPY156.30 and JPY156.80 so far today. Options look to put a cap on the dollar at JPY157 with $1.33 in options expiring there today and another $2.88 bln of options expiring there tomorrow.

Sterling reached almost $1.3570 yesterday, its highest level since mid-September before reversing lower to nearly $1.3490. It made a marginal new low today at $1.3485. This is a little more than half of the rally from Monday’s low to yesterday’s high. The 20-day moving average is closer to $1.3455.

The greenback extended its gains slightly through CAD1.3825 today and reached its best level since December 10. However, sellers emerged in the European morning and pushed the US dollar back to almost CAD1.3800. There are $1.3 bln in options at CAD1.3800 that expire today and about $850 mln at CAD1.3835 that also expire. To signal a high is in place, the US dollar must be sold below CAD1.3750-55

The Australian dollar extended its gains in the local session to slightly above $0.6765 to reach its best level since October 2024. Some buying may have been related to the expiry today of options at $0.6700 today for A$400 mln expire today and tomorrow’s expiry of A$1.05 bln options at $0.6735.

EM

The dollar remains in the range seen Monday against the Mexican peso (~MXN17.8720-MXN18.0365). It continues to consolidate. It is trading in a narrow range so far today between MXN17.9630 and MXN17.9955. 

For the first time this week, the PBOC set the dollar’s reference rate higher (CNY7.0187 vs CNY7.0173 yesterday). The dollar bottomed against the offshore yuan on January 2 near CNH7.9665. It reached a new high since the end of December today around CNH6.9930. 

The US dollar is trading heavier against the Indian rupee amid reports that the Reserve Bank of India intervened to offset the capital outflows and selling pressure as talks with the US have failed to bring down the high tariffs. The dollar reached INR89.8550, its lowest level since the end of December.

Other markets 

Global equities are mixed today. This is particularly true in the Asia Pacific region. Escalating Sino-Japanese tensions appear to be dampening Japanese department store sales amid the slowing of tourism from China and may have spurred some profit-taking on Japanese equities but the regional performance was mixed. Europe’s Stoxx 600 is trying to extend its advance for the fourth consecutive session and the sixth gain in the seven sessions. US index futures are nursing small losses.  

Bonds are rallying. Benchmark European yields are mostly off 3-4 bp, while UK Gilts are leading the move and the yield is off nearly seven basis points and the yield near 4.42% is the lowest since November following good demand at today’s auction. The 10-year Treasury yield is down a little more than three basis points to 4.14%.  

Gold and silver are trading heavily, which some have linked to the rebalancing of industry indices. 

News that the US will take and sell some $2.8 bln of Venezuelan oil initially saw February WTI fall below $56 but it has recovered to return to near $57 where is opened. Yesterday’s low was near $56.85. 

Saudi Arabia announced it was opening its markets to foreign investors, without the need to meet qualification requirements as of February 1. This is an important step toward integration in the world capital markets.   

Data

The most important US high-frequency data reports today are the ADP private sector jobs estimate and the December ISM services. The median forecast in Bloomberg’s survey is for ADP to show an increase of 50k jobs after a loss of 32k in November. The three-month moving average is nearly -5k. The stabilization of the labor market is expected to be reflected in Friday’s nonfarm payroll report. ISM services will also draw attention. It is expected to have slipped after it rose to 52.6 in November, the highest since last February. Note that also on Friday, the Supreme Court is expected to hand down decisions on President Trump’s use of emergency powers for broad tariffs.

Canada reports the December IVEY PMI. It slipped below the 50 boom/bust level in November for the first time in H2 25. The market is not particularly sensitive to the report. 

The eurozone reported its preliminary estimate for December CPI. It came in as expected at 2.0% year-over-year, down from 2.1% in November. The core rate slipped to 2.3% from 2.4%. Energy and airlines appeared to be the main movers. Germany’s harmonized measure stands at 2.2% (down from 2.6%), while French CPI was at 0.7% (down from 0.8%). Spain’s harmonized measures eased to 3.0% (from 3.2%). Italy reported its harmonized measure today at 1.2% (up from 1.1%). 

The UK’s construction PMI has not been above 50 since the end of 2024. The low point last year was reached in November (39.4). It ticked up to 40.1 in December. 

Australia’s November CPI eased more than expected, to 3.4% from 3.8%. The trimmed mean measure slipped to 3.2% from 3.3%. November trade figures are due tomorrow, and a wider surplus is expected. 

Japan reports labor earnings tomorrow. The year-over-year increase likely slowed in nominal terms and the decline in real terms likely steepened. 

China reports December CPI (expected to have risen slightly) and PPI (deflation pressures may have slackened a little). Earlier today, it reported that December reserves rose by $11.5 bln to $3.358 trillion, the most since 2015. It bought gold for the 14th consecutive month for a cumulative total of about 42 tons in this buying streak.