U.S. Dollar Steadies as Risk Appetite Wanes

U.S. Dollar Steadies as Risk Appetite Wanes

Published: February 16th, 2021

 In the week that ended on Saturday, February 13, the financial world saw three significant events. The dollar gained marginally after experiencing several back-to-back days of substantial losses. The euro and other commodity prices ticked lower. And traders regrouped to reassess the pace of the U.S. economy’s recovery based on the current jobs data.

On Friday, February 12, the dollar posted slim gains following days of back-to-back losses. The slight profits came on the backdrop of a waning risk appetite that triggered a decrease in the price of most stocks and commodities. Besides, most investors chose to make the most of the gains from other currencies just before setting in on the long weekend.

Erik Bregar, the head of FX strategy at Exchange Bank of Canada in Toronto, said the market witnessed a consolidation it had anticipated earlier in the week. He added that the risk sentiment was the dollar’s predominant driver as the week drew to a close.

While the dollar edged up, Bitcoin lost more than 2% day-on-day to close the week at just under $47,000. The slip came just hours after the world’s first crypto beat all odds to etch a weekly high of $49,000.

Overall, Bitcoin’s performance last week set it on the course of hitting 20% gains in a milestone week following endorsement by Tesla CEO Elon Musk. Bitcoin’s gains were also boosted by an announcement by BNY Mellon, an American banking group, that it had set up a unit that will help customers hold, transfer, or issue digital assets.

However, the market expressed fears that a correction is nigh. According to Craig Erlam, an OANDA analyst, investors showed some nervousness as the cryptocurrency crept closer to $50,000.

The Dollar Index Gains 0.2%

The dollar index surged by 0.2% during the mid-morning trading session on Friday, February 12, to stand at 90.621 after trading volumes were subdued in Asia because of the Lunar New Year.

However, the index was on course to a 0.5% fall week-on-week, its first weekly loss in a month. ING analysts described the index’s trend as a consolidative mood preempted by the uncertainty surrounding the pace of recovery of the U.S. economy.

The weekly U.S. jobless claims data released on Thursday, February 11, fueled concerns that the dollar’s previous rally might have priced in a faster-than-expected rebound of the economy. The dollar went up 0.3% against the yen to stand at 105.04.

Traders have differing views over how the $1.9 trillion fiscal stimulus package would affect the dollar. While some contend that it will boost the economy by speeding up the rate of recovery of the U.S. economy, others reckon that it already is feeding a global reflation narrative that would make riskier assets more attractive at the expense of the dollar.

Meanwhile, the euro slumped by 0.3% to end the week, closing at $1.2091. And the British pound hardly moved at $1.3822. It even stabilized against the euro after data indicated that the U.K.’s economy registered a record fall in 2020 but still managed modest growth in Q4.

The Canadian, New Zealand, and Australian dollars all dropped against the greenback because of the declining risk appetite. However, the tide seems to have shifted for the Canadian dollar during Monday, February 15, morning trading session.

The USD/CAD registered a disturbing freefall, dropping below $1.2650 to touch fresh monthly lows.

The loonie looks to have benefited from the robust data emerging out of Canada, the new strength of crude oil prices, and a risk-on attitude. Despite the North American markets remaining closed on Monday, February 15, for the President’s Day in the U.S. and Family Day Holiday in Canada, the rising crude oil prices sent tailwinds that reverberated across the global equity markets.

The Turnaround

Experts believe that despite the drop in stocks and commodity prices that characterized the week ending Saturday, February 12, the week beginning Monday, February 15, will see substantial changes. Some of the reasons these analysts are fronting to explain the turnaround include the crude oil rallies that begun earnestly in the first week of February.

Already, the crude oil-sensitive Canadian currency has picked up. Besides, the good news coming from the major economies will have monumental impacts as well. Despite posting marginal gains in Q4 of 2020, the U.K. has also hit a vaccination milestone of 15 million of its most vulnerable population. The achievement opens doors for economic reopening.

The U.S. has also heightened its vaccination campaign, reaching more than 2 million people in 24 hours. Besides, the seven-day moving average of new infections in Uncle Sam is now below 100,000, the first time the country has recorded such numbers since November.

The above news has boosted both equities and crude oil prices, with the crude prices also benefiting from the enthusiasm in the supply segment of the economy. However, adverse weather remains a challenge in the U.S. Arctic temperatures have brought ice, snow, and freezing temperatures.

The condition has stretched to the Gulf of Mexico, hampering oil production in the process. Texas has since declared a state of emergency, while in Oklahoma, the current condition is now a weather disaster emergency.

Meanwhile, a powerful, magnitude 7.1 earthquake that hit Japan has taken out more than 20% of the country’s refining capacity, a situation that would bear heavily on the price of crude in the coming days.

The combination of the above conditions has already pushed the price of WTI above $60, with Brent dancing above $63 during the early morning trading session on Monday, February 15.

Final Thoughts

The U.S. dollar experienced a moment of reprieve on Friday, February 12, steadying slightly and closing a week characterized by back-to-back daily drops. The increase was attributed to the waning risk appetite. The stocks dropped and took down with them the price of commodities. However, market experts are wary that the dollar might now manage a longstanding rally because of the excellent news and impressive data from the world’s major economies.

Show Results