Softer Dollar and Wild Overnight Session in Equities – Currency Thoughts
Softer Dollar and Wild Overnight Session in Equities
January 27, 2025
(207) The dollar fell overnight by 1.2% against the yen, 0.9% versus the Swiss franc, and 0.2% relative to the euro and sterling. The weighted DXY dollar index is 2.6% weaker than its 2025 high touched two weeks ago.
Stock markets initially plunged, fed by two significant uncertainties. One was the claim by the Chinese start-up DeepSeek that it has developed an AI model that runs on cheaper chips than Nvidia’s but with practically matching effectiveness. The other uncertainty concerns the fickleness of President Trump’s tariff plans. Tariffs represent a potential source of revenue to offset internal tax cuts he wants to do, but they also serve as a negotiating tool, as witnessed over the weekend. When Colombia’s government initially wouldn’t allow U.S. planes carrying deportees to land in its country, Trump threatened an immediate 25% tariff on imports from Colombia, whereupon Colombia agreed to take the deportees and Trump put enforcement of the 25% tariff on hold so long as Colombia accepts the returnees unconditionally. The negotiating nature of the U.S. tariff threat makes it near impossible for markets to correctly price their possibility. Chaos also weakens the dollar, which could facilitate the Trump agenda of slashing the U.S. trade deficit anyway.
In other stock markets overnight, Japan’s Nikkei closed down 0.9%, and the Indian Sensex lost 1.1%. The German DAX and Paris CAC so far show losses of 0.9% and 0.6%. The Pakistani stock market dropped 1.3%, depressed by a full percentage point cut in the State Bank’s policy interest rate. U.S. losses in pre-open stock futures trading have been trimmed considerably since overnight lows were touched.
Ten-year sovereign debt yields fell sharply today, led by an 11-basis point drop in the U.S. Treasury and including decreases of six basis points in comparable German and British yields, five basis points in French and Spanish yields and a two-basis point dip in the British GILT.
What the Trump administration will ultimately do regarding Bitcoin is also ambiguous, so that price fell 2.1% today. Gold and oil costs are 0.6% and 0.4% lower.
What little economic data that’s been reported today again highlights America’s advantage.
The Chicago Fed National Activity Index ended six straight sub-zero monthly readings with an seven-month peak of 0.15, matching last May’s reading and above November’s upwardly revised score of minus 0.01.
By contrast, the January IFO Institute business climate index depicted German companies as “continuing to be pessimistic” in spite of a one-point rebound in the sub-index for current economic conditions. That was good enough to lift the overall index by 0.4 points above December’s 55-month low, but the forward-looking economic expectations index sunk to a one-year low of 84.2. Among key sectors, manufacturing fell to a 56-month low, and services and construction were at 3- and 2-month lows.
Among today’s other data highlights, the Chinese government-compiled NBS composite purchasing managers index for January fell 2.1 index points to a 5-month low and stagnant reading of 50.1. Non-manufacturing had improved in December to a 9-month high of 52.2 but dropped abruptly this month to 50.2, and a streak of three straight readings above the 50.0 breakeven level ended with a 5-month low of 49.1. These data were reported earlier than usuual due to the upcoming Lunar New Year Holiday that will close down Chinese markets from Wednesday through Friday.
Japan’s indices of leading and coincident economic indicators for November have been each revised slightly upward but still represent 3- and 5-month lows.
Turkish business sentiment, whose high point in 2024 of 106.1 occurred in April, bounced up 1.8 points to 100.9 in January.
Brazilian consumer confidence slumped 5.8 points to a 23-month low this month, while consumer sentiment in Finland moved 0.3 points above December’s 7-month low.
Mexico’s $8.2 billion trade deficit in 2024 was about 50% wider than in the prior year but still considerably smaller than the deficit of about $27 billion in 2022. Going forward, Mexico has been a major object of Trump’s tariff aspirations, the precise extent of which will be determined by how successfully immigration and drug traffic across the U.S. border is halted.
Pakistan’s central bank policy rate had been as low as 7.0% from June 2020 until September 2021 and as high as 22% from June 2023 until June 2024 after Pakistani CPI inflation peaked at 38% in May 2023. Today’s rate cut of one percentage point to 12.0% was the sixth reduction since June 2023 but only half the size of the prior cut in December. Total consumer price inflation has meanwhile receded to an 80-month low of 4.1% as of last month. According to a statement today from the State Bank of Pakistan, the Monetary Policy Committee “assessed that the real policy rate needs to remain adequately positive on a forward-looking basis to stabilize inflation in the target range of 5 – 7 percent.” Such suggests only a limited additional scope for more cuts.
Markets were closed today for Australia Day in Australia. Indonesians also observed holiday, commemorating the ascension of prophet Mohammad.
Later this morning, the U.S. will release new home sales and the Dallas Fed monthly manufacturing survey. The Federal Reserve and European Central Banks have scheduled policy reviews later this week.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Chinese NBS purchasing managers surveys, IFO Institute German business climate survey, State Bank of Pakistan
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