Insights 
VT 
Risk currencies are not benefiting as anticipated after a trade truce agreement between the US and China. Two key factors are maintaining the dollar’s dominance: market reassessment of the Federal Reserve’s easing cycle and tight US money markets.
The likelihood of a 25 basis points rate cut by the Federal Reserve in December has decreased to 66%. This is influenced by the Fed’s actions and upcoming US data including the ISM manufacturing release and ADP jobs report which may impact the dollar trend.
Tightness in US Money Markets
Tightness in US money markets is characterised by reduced bank reserves and increased Treasury cash stockpiles. Recent data shows banks took $50 billion in overnight funding from the Fed, paying a higher rate than intended market rates.
Tight money conditions often support the dollar, and any international extension in these funding difficulties could impact the EUR/USD negatively. The DXY is expected to stay near the top of its range around 100.00/100.25 unless US employment data affects the probability of a Fed rate cut.
We are seeing that risk currencies are not getting the usual lift, even after the US and China agreed to a trade truce last year. There appear to be two main reasons the dollar remains the top story for traders.
First, the market is rethinking how many times the Federal Reserve will actually cut rates. After recent comments from Fed officials, the odds of a December rate cut have dropped, putting a floor under the dollar. For example, looking back at 2024, we saw the Fed hold rates steady for longer than many expected, showing a pattern of data-driven caution.
Upcoming Economic Indicators
All eyes now turn to private sector data for clues. The October ISM manufacturing number came in at 46.7, which showed a contracting factory sector and some weakness in the economy. The upcoming ADP employment report this Wednesday will be the next major test and could restart the dollar’s downtrend if it shows significant job market weakness.
The second factor supporting the dollar is the tightness in US money markets. The Fed has been reducing its balance sheet, and we have seen a massive drain of liquidity from the financial system, with the Reverse Repo Facility balance dropping by over $2 trillion since its peak in 2023. This reduction in available cash makes dollars more scarce and valuable.
These tight money market conditions are typically bullish for the dollar. We will be watching to see if this dollar funding pressure spills over into international markets, which would be a very negative sign for currencies like the Euro. For now, there are no major signs of international stress.
Given this environment, derivative traders should expect the Dollar Index (DXY) to remain strong near the top of its range around 105.00. A bet against the dollar is risky unless the upcoming jobs data is weak enough to force the market to fully price in a December Fed rate cut.
