The dollar hovered near multi-week lows against both the euro and the Japanese yen on Tuesday, as investors awaited the release of US economic data later in the session that could influence expectations for the Federal Reserve’s monetary policy path.
Attention this week is focused on central bank decisions, with the European Central Bank and the Bank of England holding policy meetings on Thursday, while the Bank of Japan is set to announce its monetary policy decision on Friday.
Euro supported by mixed data and a longer tightening bias
Economic data from the euro area were mixed but supported the European Central Bank’s stance of keeping interest rates higher for longer, lending support to the euro. German investor sentiment rose more than expected in December, while euro zone business activity growth slowed toward the end of 2025.
However, the ECB’s lack of any explicit pushback against market bets on interest rate hikes in late 2026 or early 2027 may be interpreted as tacit approval, leaving room for a hawkish surprise at this week’s policy meeting.
The euro rose by 0.05% to $1.1758, after touching $1.1769 on Monday, its highest level since September 24.
Ukraine peace talks under scrutiny
Ukraine peace talks remain in focus after Swedish Prime Minister Ulf Kristersson said tangible progress had been made on security guarantees during talks in Berlin on Monday, although investors remain cautious about the prospects of a lasting agreement.
Bank of Japan decision awaited as rate hike is priced in
A rate hike by the Bank of Japan is largely priced in by markets, but any signal pointing to further tightening ahead of spring wage negotiations would mark a shift toward a more hawkish stance.
Confidence among large Japanese manufacturers reached its highest level in four years in the three months through December, supporting expectations of additional monetary tightening. Still, analysts said the policy update may not be sufficient to support the yen amid concerns linked to fiscal pressures.
The Japanese government is planning additional tax breaks to stimulate investment, despite market concerns over rising public debt levels.
The dollar fell by 0.25% to ¥154.85 ahead of the Bank of Japan decision, while renewed volatility prompted investors to seek safe havens. The dollar had touched ¥154.34 in early December, its lowest level since November 14.
Morgan Stanley said it maintains a neutral stance on the dollar/yen pair but sees downside risks if US labor market data continue to deteriorate.
US data fog begins to lift
Interest rate futures show markets pricing a 75.6% probability that the Federal Reserve will keep interest rates unchanged at its next meeting on January 28, unchanged from the previous day, according to the CME FedWatch tool.
Stefan Koopman, senior macro strategist at Rabobank, said: “Market consensus expects November job growth to come in slightly below trend by around 50,000 jobs, with the unemployment rate between 4.4% and 4.5%, a reading that would ease concerns about the labor market while keeping the option of rate cuts alive.”
He added: “A weaker reading could trigger risk-off moves, with equities falling, the dollar weakening, and flows moving toward cash and US Treasuries.”
The dollar index, which measures the US currency against a basket of six major currencies, traded at 98.20 points, slightly lower after earlier nearing its weakest level since October 17.
Analysts were divided, with some arguing that the data would help clarify employment trends during the US government shutdown period, while others doubted they would fully remove uncertainty.
Chinese yuan hits a 14-month high
The offshore Chinese yuan rose by 0.1% to 7.0371 per dollar, its strongest level since October 3, 2024.
Chris Turner, head of global markets at ING, said: “The People’s Bank of China will not rush to accept a sharp appreciation of the renminbi, but pressures could build in 2026, especially if our expectations for two additional Federal Reserve rate cuts prove correct and the dollar weakens modestly.”
The Australian dollar was little changed at $0.6638, after a private survey showed consumer confidence slipping in December.
