The U.S. dollar recently experienced a period of consolidation against major global currencies, influenced by robust economic data and the market's subdued reaction to White House attempts to sway Federal Reserve policy. This period suggests the dollar's recent upward correction might be nearing its conclusion.
Over the preceding one to two months, the correlation between fluctuations in the Dollar Index and changes in two-year U.S. Treasury yields has been relatively low, hovering around 0.38-0.40. This indicates that while there's a relationship, other factors have played a more significant role in the dollar's performance. The euro, for instance, found a floor around $1.1600, partly due to heightened political friction between the U.S. administration and the Federal Reserve.
In the Asian markets, the dollar nearly reached CNH6.9610 against the Chinese yuan before the weekend, marking a marginal new low since May 2023. This movement highlights ongoing pressures on emerging market currencies. Concurrently, the British pound's responsiveness to the overall dollar strength has notably increased, with its 30-day rolling correlation approaching -0.85, a level not seen since late October. This amplified sensitivity suggests sterling is particularly vulnerable to broad shifts in dollar sentiment.
Conversely, the Canadian dollar demonstrated minimal reaction to Prime Minister Carney's trade agreement with Beijing, which allows 49,000 Chinese-made electric vehicles to enter Canada at a most-favored-nation tariff rate of approximately 6.1%. This muted response indicates that domestic economic factors or other global influences may be currently overshadowing trade policy impacts on the Canadian currency.
The dollar's recent stability, underpinned by strong U.S. economic indicators and a resilient Federal Reserve, suggests a potential turning point. While the greenback has held its ground, various global currencies are showing distinct reactions to evolving economic and political landscapes, hinting at a dynamic period ahead for foreign exchange markets.