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Dollar Gains Ease As Newsflow Slows

The dollar looks set to break its four-day winning streak, reversing some of its gains as traders and investors tiptoe back into risk-sensitive assets within a quieter economic data environment. North American equity futures are building up to a mildly-positive open, Treasury yields are slipping, and most currency majors are posting incremental gains.

Oil prices are pushing higher after the US hit another 14 Houthi launch sites in Yemen, and Pakistan launched an aerial assault against targets in Iran. The attack comes after an Iranian missile strike on Pakistan-based militants on Tuesday, and threatens to escalate into a wider conflict between two of the most heavily-militarized powers in Asia – but this looks unlikely to us. The two countries have established a stronger relationship in recent years, and both appear narrowly focused on targeting jihadi groups based in essentially-lawless border regions. The overnight bounce in both Brent and West Texas Intermediate benchmarks could fade as geopolitical posturing is wound down.

A recovery in the British pound appears to be running out of oomph, with persistent economic concerns outweighing yesterday’s hotter-than-anticipated inflation print in limiting the currency’s gains against the dollar and euro. Few expect price growth to remain elevated against a softening growth backdrop, meaning that the Bank of England should begin pivoting toward easing in coming months.

The American consumer remained undaunted in December, with yesterday’s data showing a 0.8-percent rise in “control group” retail sales last month – well above market expectations. All major sub-components and aggregates were positive, suggesting that the rollover into early 2024 spending should be relatively strong.

The economy’s underlying momentum still doesn’t look consistent with market expectations for aggressive rate cuts. Recent data shows the inflation trajectory remaining stubborn, a range of sentiment indicators have turned upward, and the Atlanta Fed’s nowcasting model is pointing to a 2.4-percent expansion in first-quarter gross domestic product.

Subcomponent contributions to GDPNow real gross domestic product forecast, Q1 2024

The US is still running the world’s hottest economic club, rendering a wholesale easing in monetary policy settings unlikely, while making it dangerous to hold short positions against the dollar. We think a slowdown is coming, but with the euro area mired in near-recessionary conditions, Japan struggling to emerge from a decades-long morass, Chinese policymakers working to unwind history’s biggest property bubble, and Canada floundering under one of the world’s heaviest debt burdens, it isn’t clear that there is another currency ready to assume the greenback’s mantle.

Ahead today: The US is expected to report roughly 205,000 initial claims for unemployment benefits were filed in the week ended January 13, up modestly from 202,000 a week prior. Housing starts are seen dropping to an annual pace of 1.43 million in December from 1.56 million in the previous month. No first-tier data releases are scheduled in Canada.

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