Risk-On Sentiment Sends US Dollar Lower: Is Euro Parity Slipping Away?
Last week, the forex market was primarily influenced by the Fed decision and jobs report.
The Fed, while maintaining interest rates as expected, continued to underscore its determination to combat inflation, with a notable shift towards a more hawkish tone, which spurred an increase in risk appetite.
The employment data, released on the last business day of the week, further fueled the growing risk appetite, signaling that the impacts of the Fed's tightening monetary policy were beginning to manifest in the US economy.
As a result of these developments, US Treasury yields saw a significant decline, accompanied by a drop in US dollar. Yields on US 2-Year Treasuries continued their descent from the October peak of 5.25%, reaching 4.8% last week.
Similarly, 10-Year Treasury yields experienced a drop of over 5% last week, sliding from their 5% peak to 4.6% this week.
As the decline in bond yields continued to trigger a loss in the dollar, the DXY (US Dollar Index) retraced to the 104 level, shifting from a flat trend to a downward trajectory after last week. This momentum was fueled by the rapid ascent of major currencies against the dollar.
The increase in risk appetite also facilitated the best weeks for US indexes since November 2022. The Nasdaq surged by 6.48% and the S&P 500 by 5.85% last week, accompanied by a significant surge in demand, marking the end of the correction phase from the final week of October.
Despite the change in risk perception and weakening economic data, it appears that recession concerns have not yet surfaced in the stock markets. The continuation of the recovery, coupled with the seasonal effect, seems likely.
However, the sustainability of the positive market sentiment depends on several
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