The dollar holds on to gains, keeping an eye on Federal Reserve minutes and economic data

The dollar held steady near two-week highs in currency markets on Wednesday after a jump in the greenback that was supported by higher Treasury yields and a cautious turn in investor sentiment. However, currency trading was relatively subdued, with Japanese markets closed for the holidays and investors awaiting important US economic data later in the day, including Federal Reserve meeting notes for December.

According to the latest data, the euro was mostly steady at $1.0932 against the dollar. On Tuesday, the euro fell 0.95% against the dollar, its biggest one-day loss since July. Meanwhile, the dollar index rose slightly to 102.3433, essentially holding on to yesterday's 0.86% gain.

(Dollar index, EUR/USD daily chart, source: Easy Huitong Finance)

Bets on a US rate cut in 2024 were further fuelled by a dovish tilt at the Fed's December policy meeting, prompting a surge in risk appetite that sent the dollar down and triggered a rally in US debt and equities. The dollar index hit a five-month low of 100.61 last week.

However, as the year went on, the market changed. A wave of risk aversion caused the S & P 500 and Nasdaq to close lower, weighed down by big tech stocks. Meanwhile, Treasury yields jumped, increasing the attractiveness of Treasuries and pushing the dollar higher.

Alvin Tan, head of Asian FX strategy at RBC Capital Markets, believes that what happened in the second half of December was not justified. The market overreacted to the idea that the Federal Reserve was about to cut interest rates in Quarter 1, sending the dollar lower. He expects the reversal to continue for some time.

In addition, the dollar rose 0.43% against the yen at 142.57 yen, after gaining 0.82% in the previous session. Investors will be closely watching the Fed's December meeting notes released at 03:00 am Beijing time on Thursday for any clues about the actual number of rate cuts the Fed has made this year.

The US job openings data for November and the Institute for Supply Management manufacturing PMI are also likely to have an impact on the market, which will become even more important as more traders return to the market.

In terms of the New Zealand dollar against the dollar, the latest rose 0.11% to $0.6259. Earlier on Wednesday, the New Zealand dollar fell to a two-week low of $0.6246 against the dollar. Separately, the pound rose 0.21% to $1.2646 against the dollar. On Tuesday, the pound fell 0.87% against the dollar, its biggest one-day drop in nearly three months.

Analysts point out that risk aversion is driven in part by fears of escalating geopolitical tensions. Ray Attrill, head of foreign exchange strategy at National Australia Bank, believes that in the new year, the market may find it difficult to completely ignore geopolitical factors. The overall market environment is complex and volatile, and it is necessary to pay attention to the combined impact of multiple factors.