Dollar Heads for Worst Weekly Drop Since June
The US dollar is heading for its worst week since June, not because of poor economic data, but because the market is increasingly confused by the perceived unpredictability of US policy. The dollar index fell to a three-week low and weakened by around 0.8% in the five days leading up to next week's Fed meeting.
What confused investors this week was Trump's shifting maneuvers: he had threatened tariffs on Europe over the Greenland issue, then abruptly backed off after a framework agreement was reached in Davos. These rapid changes have led market participants to view political risks as more dominant than monetary factors.
Interestingly, the dollar weakened when US Treasury yields rose, as the market viewed the US economy as still quite strong and the Fed as likely to hold interest rates. This means the dollar fell not because the Fed appeared dovish, but because market confidence in the consistency of US policy was being tested.
In the derivatives market, trader attitudes have also shifted rapidly. They are now paying higher prices to hedge against dollar weakness over the next month—a sharp contrast to last week, when bullish dollar sentiment was at its highest since November. Short-term volatility has also increased ahead of the Fed's January 28 decision.
Data-wise, US jobless claims remain low and relatively stable, signaling that the labor market hasn't shown any major cracks. But that's not enough to restore support for the dollar, as markets are more focused on policy and political "event risks" in the coming weeks.
Next in focus: Trump said he has finished interviewing candidates for the next Fed chair and has a name in mind. This comment adds a new layer of uncertainty, as a change in Fed leadership could shift interest rate expectations—and make the market even more sensitive to every headline.
5 key points:
The dollar is headed for its worst week since June, down about 0.8% in five days.
The main cause: US policy uncertainty, not economic data.
Trump's rapidly changing tariff maneuvers on Europe and Greenland are causing market whipsaws.
Yields rise but the dollar falls → political risk is seen as more dominant than monetary risk.
The market awaits the Fed (January 28) and signals regarding Trump's chosen Fed chair candidate.
Source: Newsmaker.id
