The dollar index fell sharply on Friday, capping its worst weekly performance since November. Conciliatory comments from President Donald Trump in a Fox News interview, where he suggested a potential trade deal with China, eased fears of escalating economic conflicts. Treasury yields declined as U.S. business activity slowed to a nine-month low in January, heightening concerns about economic momentum. The Federal Reserve is expected to hold interest rates steady next week, a decision criticized by Trump, who reiterated his preference for more accommodative monetary policy. Portfolio rebalancing ahead of month-end and a near two-month high in the yuan added further downward pressure on the greenback, as currency volatility eased across tenors.

Euro Hits Year-to-Date High on Strong PMIs and Positive Sentiment

The euro surged to a new year-to-date high of 1.0521, boosted by better-than-expected German and French PMIs for January, which improved market sentiment. The pair broke above its 55-day moving average as short-covering and bullish momentum took hold. Positive remarks from BlackRock CEO Larry Fink, who suggested Europe could become an attractive investment destination, added further support. EUR/CHF rallied over 0.6%, testing its 200-DMA at 0.9507, as European sentiment improved.

Sterling Rises on U.K. PMI Data and Bullish Momentum

The pound climbed above 1.25, nearing its 55-day moving average at 1.2549, following marginally better-than-expected U.K. composite PMI data for January. Bullish short-term momentum added to sterling’s gains, as geopolitical optimism also bolstered risk sentiment. Markets cautiously welcomed Russian President Vladimir Putin’s openness to discussions with Trump on Ukraine and energy prices, though concrete outcomes remain uncertain.

Yen Gains Against Dollar Amid Weakening Haven Demand

The yen strengthened against the dollar but weakened against other G10 currencies as improving risk sentiment reduced demand for haven assets. USD/JPY tested trendline support near 154.80, with traders eyeing potential further losses if the level holds firm.

Commodity Currencies Gain on Trade Optimism

Commodity-linked currencies like the Australian dollar gained amid dollar weakness, supported by improved sentiment around U.S.-China trade relations. AUD/USD rose 0.46%, reflecting risk-on flows and optimism over improving global trade dynamics.

Commodities Reflect Mixed Sentiment Amid Dollar Weakness

• Gold: Gained 0.71%, approaching its all-time high as the weaker dollar boosted demand for the safe-haven metal.
• Oil: Held steady as Trump reiterated his call for OPEC to lower prices, keeping the market cautious.
• Copper: Fell 0.22%, reflecting tempered optimism despite broader risk-on sentiment.

Equities and Yields Reflect Mixed Dynamics

U.S. Treasury yields fell by 0 to 2 basis points, reflecting a modest repricing of risk, while the 2s-10s curve remained stable at +35.5bp. The S&P 500 slipped 0.1%, dragged lower by losses in the tech sector, even as broader sentiment remained optimistic.

Currency Market Movements Reflect Dollar Weakness

• EUR/USD: Gained 0.78%, breaking higher on strong European data and dollar softness.
• GBP/USD: Rose 1.06%, bolstered by U.K. PMI data and improved sentiment.
• USD/JPY: Fell 0.35%, reflecting yen strength amid falling U.S. yields.
• AUD/USD: Gained 0.46%, supported by trade optimism and risk-on flows.
• Cross-Currency Pairs:
  • EUR/JPY: Gained 0.73%, reflecting euro resilience amid yen softness.
  • GBP/JPY: Rose 1.00%, supported by improved sentiment in sterling and broader risk-on dynamics.

Market Outlook: Focus Turns to Fed Decision and Economic Data

• Dollar: Faces additional downside risks as easing trade tensions and improving risk sentiment weigh on demand for safe-haven assets.
• Euro: Poised to benefit further if European economic data continues to support bullish sentiment, though technical resistance near 1.0550 could limit gains.
• Pound: May see further gains if U.K. data aligns with improving sentiment, though political risks remain a cap on upside potential.
• Yen: Expected to remain stable against the dollar, with market attention on geopolitical developments and economic risks.
• Commodity Currencies: Australian and Canadian dollars could see additional gains if optimism around global trade persists, but commodity price volatility remains a key risk.

Conclusion: Dollar Weakness Highlights Easing Trade Fears as Markets Brace for Fed

The dollar’s sharp decline underscores market optimism around easing trade tensions and improving global sentiment. The euro, pound, and commodity-linked currencies capitalized on the greenback’s softness, while the yen and gold provided safe-haven stability. With the Fed’s upcoming rate decision and key economic data on the horizon, markets remain poised for heightened volatility and shifting dynamics in the days ahead.