FOREX-Dollar holds steady as risk rally stalls

UNITED STATES: The dollar eased slightly on Wednesday though it stayed near a two-week high, underpinned by a confluence of factors including elevated U.S. Treasury yields and a cautious turn in risk sentiment that weighed on Wall Street. Trading was thinned in Asia with Japan out on a holiday, with the greenback paring some of the morning gains over the course of the trading day in the region.

The New Zealand dollar, often used as a proxy for risk appetite, was last 0.29% higher at $0.62695, having slid to a two-week low of $0.62485 earlier on Wednesday. The Australian dollar likewise bounced 0.09% to $0.6767, after also hitting a two-week trough of $0.6756 during the session.

Still, against a basket of currencies, the greenback stood not too far from a two-week top of 102.25 hit on Tuesday, and was last at 102.13. The dollar index had jumped 0.86% on Tuesday, which marked its best daily performance since March 2023.

A surge in risk appetite at the end of last year - sparked by a dovish tilt in the Federal Reserve's December policy meeting which further fuelled bets for U.S. rate cuts in 2024, had toppled the greenback and sparked a rally in Treasuries and stocks. That, however, failed to carry on into the New Year, with a bout of risk aversion causing the S&P 500 and Nasdaq Composite to close their first trading session of 2024 lower, dragged down by big tech names.

"We've just seen quite a significant reversal in risk sentiment," said Ray Attrill, head of FX strategy at National Australia Bank (NAB). "Higher U.S. yields, weaker U.S. stocks equals stronger dollar. I think that's the simple story." "The kiwi dollar, which has been one of the more risk-sensitive currencies, has sort of underperformed versus most other currencies as well," said Attrill.

The euro and sterling were meanwhile nursing deep losses, after the currencies had on Tuesday clocked their worst daily performance in months. The euro rose 0.14% to $1.0955 after having lost 0.95% on Tuesday, its largest daily decline since July last year.

Sterling gained 0.11% to $1.2633, having slid 0.87% in the previous session, its sharpest daily fall in nearly three months. The greenback was underpinned by a rebound in U.S. Treasury yields, which saw the benchmark 10-year yield hitting an over two-week high in the previous session.

Cash trading of Treasuries in Asia was closed on Wednesday given the holiday in Japan. Elsewhere, the yen remained under pressure and slid roughly 0.1% to 142.05 per dollar, after falling nearly 0.8% in the previous session.

Analysts said the risk-off mood was also in part driven by concerns over escalating geopolitical tensions, after Israel killed Hamas deputy leader Saleh al-Arouri in a drone strike in Lebanon's capital Beirut on Tuesday. "I suspect that markets (are) starting the year with finding it hard to completely ignore geopolitics," said NAB's Attrill.