Forex trading alert: Dollar under slight pressure as German business confidence data boosts the euro

In early Asian trading on Tuesday, the dollar index was trading in a narrow range around 1.0606. The dollar index fell 0.13% on Monday as upbeat German business sentiment data supported the euro and investors' appetite for riskier currencies improved slightly, weighing on the safe-haven dollar.

Germany's economic outlook improved towards the end of the year in spite of the energy crisis and high inflation, with business confidence rising more than expected in December, according to a survey released on Monday.

The euro rose 0.17% to 1.0607 against the dollar on Monday, not far from the six-month high of 1.0735 it hit last week.

"I think the dollar is generally weaker because of the increase in risk-taking," said John Doyle, vice president of trading at Monex America.

The Federal Reserve's hawkish stance and rising geopolitical tensions have rallied for much of this year, but have come under pressure in recent weeks as investors bet that the Fed's room for continued rate hikes to fight inflation may be limited.

Last week, Federal Reserve Chairperson Jerome Powell said that despite the possibility of a U.S. recession, the Federal Reserve will continue to raise interest rates next year, with peak interest rates expected to exceed 5 percent.

ECB Vice President Jean-Claude de Guindos said on Monday that he would continue to raise interest rates to curb inflation and was not considering revising the 2% medium-term inflation target.

The Australian dollar, seen as a liquidity barometer of risk appetite, rose 0.19% against the dollar on Monday after the Chinese government pledged to support the economy next year.

"The Aussie got some boost from the Chinese news and [today's move] could be a relief rally from Friday's crackdown," Mr. Doyle said.

The dollar rose 0.2 percent against the yen and fell as much as 0.7 percent on reports that Japan is considering revising a key monetary policy following the appointment of a new Bank of Japan governor in April.

According to sources, the government will consider revising a joint statement it signed in 2013, which committed the Bank of Japan to achieve its 2% inflation target as soon as possible.

"As a result, it may provide timely flexibility but it does not constrain the bias of monetary policy in any way," said Vishnu Varathan, head of economics and strategy at Mizuho Bank, adding that more detail was needed to have a greater impact on the yen.

The South African rand jumped more than 2 percent after President Ramaphosa was re-elected as leader of the ruling African National Congress.

The overall foreign exchange market was less volatile on Monday, with the New Zealand dollar falling 0.2% against the dollar to close at 0.6363; the pound fell 0/05 against the dollar to close at 1.2144 on Monday.

Key economic data and events on Tuesday

institutional perspective

Bank of America strategist: Active funds will outperform the index in 2023 under a more rational market

Savita, strategist at Bank of America, says active funds will outperform indices next year as markets become more rational after the 2022 decline. The S & P 500 is overweighted by long-term, high-growth technology stocks, "the kind of past leaders" who did well in the era of ultra-low interest rates. "We're moving into a more rational environment and really need to pick the winners carefully." She prefers stocks over bonds over the next 10 years. The bank's long-term model was "very bearish" on stocks at the start of 2022. But because of this year's correction, "the outcome is now 5 per cent a year for the next 10 years, not the negative returns you got at the start of the year," she says. "It's not going to be as good as it was in the 2010s, but it's better than negative."

Greg Fuzesi, economist at JPMorgan, said: "A key difficulty is the ECB's inability to determine how high interest rates must rise, which reflects significant uncertainty about policy transmission and the inflation outlook."

Ulrike Kastens, economist at DWSInternationalGmbH, said: "Inflationary pressures will persist and the biggest challenge for the ECB is to convince markets that it really wants to fight high inflation in a credible way."

A model developed by Steven Englander, global head of G10 FX strategy at Standard Chartered, shows that 55% of the dollar's gains in the first half of this year were driven by interest rate differentials (more importantly, expectations around the path of US monetary policy relative to other developed countries), and another 45% were driven by safe-haven flows.