The US Dollar continued to hover near a two-week high on Wednesday, building on the gains from the previous day. The currency's rally was supported by heightened US Treasury yields and a cautious sentiment that impacted Wall Street.

Key highlights

• Subdued trading and Japanese market closure: Trading activity remained relatively subdued, with Japanese markets closed for a holiday. Investors adopted a wait-and-watch approach, anticipating crucial US economic releases scheduled later in the day. This included the eagerly awaited minutes from the Federal Reserve's December meeting.
• Euro's reaction and Dollar Index movement: The Euro showed a modest recovery, up 0.12 per cent against the Dollar at $1.0954. This followed a 0.95 per cent drop on Tuesday, marking its most significant daily decline since July. The Dollar index, tracking the currency against six major peers, edged slightly lower to 102.18. However, it retained almost all of the previous day's gains, amounting to 0.86 per cent.
• Rationale behind Dollar's rally: The Dollar's recent surge is attributed to a cautious turn in markets and elevated US Treasury yields. A shift in risk appetite towards the end of the previous year, driven by lower inflation and a dovish stance in the Federal Reserve's December meeting, had triggered expectations of US rate cuts in 2024. However, this sentiment dampened with the onset of the New Year, leading to declines in the S&P 500 and Nasdaq Composite during their first trading session of 2024.
• Market sentiment and expectations: Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets, expressed skepticism about the market's reaction in December, stating that the anticipation of imminent Fed cuts in the first quarter had driven the Dollar lower. He suggested that the ongoing reversal in sentiment might continue for a bit longer.
• Dollar's performance against Yen and Fed minutes focus: The Dollar strengthened against the Japanese Yen, rising by 0.43 per cent to 142.57, building on the previous day's gain of 0.82 per cent. Investors eagerly awaited the release of minutes from the Federal Reserve's December meeting at 1900 GMT (2 p.m. ET), seeking insights into the central bank's potential rate cuts in the upcoming year.
• Impact on risk-related currencies: The New Zealand Dollar, often considered a proxy for risk appetite, recorded a 0.11 per cent gain at $0.6259 after hitting a two-week low of $0.6246 earlier in the day. Sterling recovered slightly, rising by 0.21 per cent to $1.2646, following a 0.87 per cent decline in the previous session, marking its sharpest daily fall in nearly three months.
• Geopolitical tensions and market sentiment: Concerns over escalating geopolitical tensions added to the risk-off mood. Israel's drone strike that resulted in the death of Hamas deputy leader Saleh al-Arouri in Lebanon's capital Beirut on Tuesday contributed to the prevailing cautious sentiment in the markets.

(With Reuters inputs.)