Markets: Why is the spotlight on the dollar today?

The Asian Stock Markets in a Positive Trend

Today, the markets open with Asian stock indices rising towards the end of trading, but investors’ attention is mainly focused on the dollar and the currency market in general.

The Consolidation of EUR/USD Pair and Market Expectations

Asian stocks have risen in a mixed session, while the greenback has taken a pause from its recent rally.
The EUR/USD pair is consolidating its recovery while remaining below 1.0700 just before the opening of European stock exchanges.
Despite looming geopolitical risks in the Middle East, the U.S.
Dollar continues its corrective decline amid stabilizing sentiment.

Of particular note, in the financial landscape dominated by Forex, is the news of an unusual trilateral agreement between the United States, Japan, and South Korea to initiate consultations on currency markets.
The recent volatility in the Forex market, driven by the strength of the dollar, has brought instability especially to Asian currencies.

The dollar index shows a slight decline to 105 points as of the current writing.

Recent data suggest a rise in currency volatility, with markets closely monitoring the dollar amidst increasing geopolitical tensions and inflation concerns.
The latest surge in volatility came after Iran’s attack on Israel, following strong U.S.
inflation data last week, fueling speculations about the Federal Reserve’s monetary policy direction.

The Impact of Federal Reserve’s Policy on Currency Markets

In this context, the dollar has strengthened against other currencies, as expectations of a more aggressive Fed policy compared to the ECB and BoE have fueled further appreciation of the greenback.

Commenting on today’s market performance, Rajat Agarwal, Asian strategist at Société Générale, stated: “The market’s current reaction is driven by the pause in the dollar rally and the increase in U.S.
bond yields.
There is little concern regarding growth, but the fate of the dollar and Treasury bonds will be a key factor to watch.”

While the South Korean won led the rise in Asian currencies against the dollar, the global emerging markets currency index was heading for a second day of gains, indicating some stability after hitting a 2024 low earlier this week.

Despite potential easing of tensions in the Middle East, currency volatility and hedging costs are expected to remain above multi-year lows seen earlier this year, as bets on central bank policy divergences continue.