The DXY Index depreciated 0.8% to 96.855 overnight, adding to last Friday’s 0.2% decline. Bloomberg reported that Chinese regulators advised domestic financial institutions to manage risks over their US Treasury holdings, triggering a 4.2-bps surge in the US 10Y Treasury yield to 4.25%. However, the long bond yield stabilised lower at 4.20% after markets realised that the advice came weeks before President Donald Trump’s phone conversation with Chinese President Xi Jinping last week. Politico reported that Trump will visit China in the first week of April for a summit with Xi.
The New York Fed reported that 1-year inflation expectations declined to 3.09% in January from 3.42% in December, keeping market expectations for more Fed cuts later this year intact. Fed Governor Stephen Miran said that the USD would need to drop significantly to lift inflation, echoing Trump’s desire for lower rates to achieve a more competitive USD. Atlanta Fed President Raphael Bostic recounted how investors questioned the USD’s credibility during a trip to Europe last summer. Gold closed above USD5000/oz for the first time since January 29, but needs to break above 5100 to return to its record high of 5600.
EUR, the largest component (57.6% share) in the DXY basket, appreciated 0.8% to 1.1914, breaking out of a four-day consolidation around 1.18. European Central Bank officials also clarified that they would not overreact to the recent drop in CPI inflation, which was slightly below its 2% target, and downplayed the EUR’s recent strength. They maintained that the Euro Area economy and monetary policy were “in a good place,” reaffirming the stance at last week’s Governing Council meeting. ECB President Christine Lagarde urged lawmakers at the European Parliament to follow up on reforms to strengthen Europe’s resilience, competitiveness, and sovereignty. Lagarde’s push for a larger global role can be viewed as an initiative towards a “strong euro policy.”
The JPY stabilized and recovered after Prime Minister Sanae Takaichi’s landslide victory at Japan’s February 8 snap election. The Takaichi government moved swiftly to puncture speculation of unchecked post-election JPY weakness. Finance Minister Satsuki Katayama stressed that a strong mandate did not imply a proactive fiscal policy without discipline. She and Vice Minister for International Affairs Atsushi Mimura reaffirmed vigilance against excessive JPY weakness – keeping intervention fears alive. Katayama added that she remained in close contact with US Treasury Secretary Scott Bessent to maintain USD/JPY stability. Although Bessent ruled out US participation in intervention, he emphasized that stabilizing the JPY was a byproduct of a credible mix of Japan’s fiscal and monetary policies.
All said, we remain cautious about reading too much into Monday’s USD weakness. Like it or not, volatility has picked up significantly since late January, raising the risk that market moves reflect position adjustments rather than a clean fundamental direction. China’s long Lunar New Year holiday is approaching and is normally characterised by thinner liquidity and reduced regional participation.
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