Euro weakness sends dollar index higher as German manufacturing PMI disappoints 

On Tuesday, the U.S. dollar index made gains as the recent rally in riskier currencies took a pause. The currency strengthened against the euro after the release of disappointing German economic data and against the Australian dollar after the Reserve Bank of Australia (RBA) raised interest rates while suggesting that this hike might be the last one in the current cycle. 

The dollar index, which measures the strength of the U.S. dollar against six major peers, rose by 0.35% to reach 105.65. This increase was driven by a 0.37% drop in the euro to dollar exchange rate, bringing it to $1.0677, and a 0.4% decline in cable — the pound to dollar rate — to $1.2288. 

The euro's weakness was partly attributed to a release of key data in the eurozone on Tuesday, which revealed a larger-than-expected decrease in German industrial production in September. 

USD strength: Last week sees greenback retreat against major currencies 

Last week, the euro, like many other currencies, had gained significant ground against the greenback on the back of various data points, notably the U.S. job growth slowdown in October, which caused a decline in USD value. 

As a response to this, markets began to factor in potential rate cuts by the Federal Reserve by the middle of the following year. This, in turn, led to a decrease in U.S. Treasury yields and an increase in risk appetite. The U.S. dollar had seen a 1.4% decline in the previous week, marking its largest drop since mid-July, following a period of strong gains. 

Chester Ntonifor, foreign exchange strategist at BCA Research, told Reuters: 

"If you look at the percentage of currencies that have been down versus the dollar over the last 26 weeks, it was approaching 100%, and data also showed very long dollar positioning ... so we got a reversal of some of those positions triggered by the jobs report”. 

Where markets go from here "will have to depend on the incoming data”, the analyst said. 

Markets.com Chief Market Analyst Neil Wilson recapped the impact of the U.S. jobs report in his latest morning notes on Tuesday:  
  
“Nonfarm payrolls increased by 150,000 in October, whilst the previous month was revised down quite a bit. The NFP broke the back of the bond bears – hedge funds went even more short in the run up. The US 10yr yield has retreated over 40bps in the last couple of weeks, with the sharp move lower last Friday following the jobs report seeing it back under 4.6%. But the front end has also shipped as markets dial back expectations for another Fed hike and bring forward when they think it will cut”. 

Federal Reserve: Eyes on central bank speakers 

The recent rally in bonds and equities appeared to be losing momentum, as yields started to rise at the beginning of the week. Market attention was shifting towards the comments of Federal Reserve officials.   
Federal Reserve Bank of Minneapolis President Neel Kashkari mentioned on Monday that the central bank likely had more work to do to control inflation. 

Federal Reserve Chairman Jerome Powell is scheduled to speak on Wednesday and Thursday, and observers will be closely monitoring whether he maintains the more dovish tone that was evident after the Fed's policy meeting last week. 

USD forecast: ING says DXY may bounce in 104.5-106.5 range before year-end 

In the Daily FX overview on Tuesday, Chris Turner, Global Head of Markets at Dutch bank ING, pointed   
  
“At issue will be whether the Fed chooses to push back against the loosening of US financial conditions. Recall that the tightening of financial conditions in mid-October prompted remarks such as the 'term premium is doing the tightening'. Now that these financial conditions have fully reversed that October spike, the Fed will presumably want to re-emphasise the risk of further rate hikes. 

Risks look skewed to a mildly stronger dollar today. DXY closing above 105.50 undoes some of last week's bearish work. But from where we stand, it looks like DXY might bounce around in a broad 104.50-106.50 range into year-end.” 

At the time of writing, the DXY index was trading at 105.70, up 049 points and 0.46% on the day, as per MarketWatch data. The euro to dollar exchange rate stood at $1.0671, with the USD gaining close to 0.5% against the common currency on the day. 

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