The dollar weakened to its lowest point this year following a confluence of events on Friday: the Bank of Japan’s (BOJ) long-awaited interest rate increase, unexpected growth in the Eurozone business sector, and positive comments from former President Donald Trump regarding China.
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The initial week of the Trump Presidency was marked by intense scrutiny of the new administration’s policies, with markets attempting to decipher every signal on trade, energy, and deregulation. Wall Street reached another record closing high on Thursday, driven by optimism surrounding corporate earnings and Trump’s pronouncements on lowering oil prices to reduce interest rates. Stock index futures maintained these gains early Friday, with major technology companies poised to release their fourth-quarter results the following week.
Dollar Weakens Amidst Global Shifts
However, the dollar faced pressure overnight due to a series of international developments that could prompt global investors to reconsider their strong preference for U.S. investments.
The yen strengthened after the BOJ implemented a quarter-point increase in its key policy interest rate to 0.5%, the highest level since the 2008 global financial crisis. Market reaction was subdued, as the hike was perceived as neither overly dovish nor hawkish. While the BOJ raised its inflation forecasts, indicating confidence in rising wages sustaining inflation around its 2% target, Governor Kazuo Ueda stated there was no predetermined plan for future rate increases. Japan’s Nikkei stock index closed flat.
China Responds Positively to Trump’s Comments
The Chinese yuan experienced more significant movement after Trump indicated in a Fox News interview that his recent conversation with Chinese President Xi Jinping was amicable and expressed optimism about reaching a trade agreement. Although he maintained that tariff threats provided leverage to pressure China on issues like fentanyl trafficking, he stated a preference for avoiding their implementation. The offshore yuan surged to its highest level since November, and Chinese stocks rallied 1-2% on Friday.
Eurozone Business Confidence Surges
European stocks also saw a significant increase, rising nearly 1% to record highs. The euro reached its strongest level in over a month, exceeding $1.05 for the first time since mid-December, fueled by signs of renewed confidence in the Eurozone business sector. The preliminary composite Eurozone Purchasing Managers’ Index (PMI) from HCOB, compiled by S&P Global, rose to 50.2 in January from 49.6 in December, unexpectedly surpassing the 50 mark that separates growth from contraction.
Anticipation of another interest rate cut by the European Central Bank (ECB) next week, with expectations of further reductions to follow, bolstered sentiment. Relieved by a seemingly less aggressive stance on tariffs from Trump, the former president’s commitment to ensuring liquefied natural gas supplies to Europe, and even hopes for a Ukraine peace agreement, Eurozone stocks have outperformed the S&P 500 by a factor of two this year.
Reassessing Transatlantic Investment Opportunities
The potential dissipation of excessive pessimism surrounding Europe has prompted numerous asset managers to re-evaluate the significant valuation disparities between European and American markets. BlackRock CEO Larry Fink, speaking at the World Economic Forum in Davos, suggested that it might be time to reinvest in Europe.
Positive corporate earnings updates, particularly in the luxury sector, contributed to the overall positive sentiment. Burberry’s stock price surged 11.5% following a smaller-than-anticipated decline in quarterly comparable store sales. Other luxury brands like Hugo Boss, Moncler, and Kering also experienced significant gains.
US Corporate Confidence Remains High
On Wall Street, corporate confidence remains buoyed by robust earnings growth exceeding 10%. Trump’s calls for OPEC to lower oil prices and for global interest rates to decline further fueled this optimism.
While the Federal Reserve is unlikely to lower interest rates at its upcoming meeting next week, markets anticipate a quarter-point reduction by midyear. However, the Bank of Canada is expected to follow the ECB in lowering borrowing costs in a week filled with central bank meetings.
Bitcoin Rises Following SEC Decision
Bitcoin rebounded as the U.S. Securities and Exchange Commission (SEC) rescinded accounting guidance long opposed by the cryptocurrency industry, marking an early departure from the policies of the previous administration. Trump established a cryptocurrency working group to propose new digital asset regulations and explore the feasibility of a national cryptocurrency reserve.
Upcoming Market Drivers
Key developments anticipated to influence U.S. markets include the release of January’s ‘flash’ business surveys from S&P Global, December’s existing home sales data, the final reading of the University of Michigan’s January consumer sentiment survey, and earnings reports from major corporations such as American Express, Nextera, Verizon, and HCA. The World Economic Forum in Davos, featuring presentations from IMF Managing Director Kristalina Georgieva and ECB President Christine Lagarde, and a WTO ‘mini ministerial’ meeting will also contribute to market direction.
