**Market Analysis: Dollar Takes a Breather Amid Treasury Picks and Divergent Rate Expectations**

By Wayne Cole

SYDNEY (Reuters) – The U.S. dollar retreated slightly on Monday after a period of sustained gains, driven by the U.S. Treasury Secretary nominee’s impact on the bond market, which led to a decline in bond yields and slightly diminished the currency’s rate advantage.

Yields on 10-year Treasury bonds decreased to 4.351%, down from 4.412% late Friday. This shift followed President-elect Donald Trump’s nomination of fund manager Scott Bessent, a move that seemed positively received by the bond market, as Bessent is recognized as an experienced Wall Street professional and a fiscal conservative.

However, it’s noteworthy that Bessent has advocated for a strong dollar and has supported tariffs, indicating that any weakness in the dollar could be short-lived. Ray Attrill, head of FX research at NAB, expressed confusion over the dollar’s decline being attributed to Bessent’s appointment, given his history of supporting dollar strength post-Trump’s election.

With the dollar having risen for eight consecutive weeks—only the third time this century—some market consolidation may be expected. The U.S. dollar index was last reported at 106.950, down 0.5%, after reaching a two-year peak of 108.090 on Friday. The dollar fell 0.4% against the Japanese yen to trade at 154.11, steering away from its recent high of 156.76.

In the eurozone, the euro appreciated by 0.5% to $1.0478, distancing itself from a two-year low of $1.0332 hit last Friday. Key resistance levels for the euro are seen at $1.0555 and $1.0610, while support rests at $1.0195 and the significant psychological level of $1.0000.

**Diverging Rate Outlooks Affect Market Sentiment**

The euro’s recent fluctuation was largely influenced by weak European manufacturing surveys (PMI), juxtaposed against stronger U.S. economic data. This disparity has led to a drop in European bond yields, further widening the gap with U.S. Treasury yields, consequently favoring the dollar.

Market participants are increasingly anticipating aggressive easing measures from the European Central Bank (ECB), with the probability of a half-point rate cut in December climbing to 59%. By contrast, expectations for a quarter-point rate cut by the Federal Reserve in December have decreased to 52%, down from 72% a month prior. Currently, markets are pricing in approximately 154 basis points of rate cuts from the ECB by the end of the next year as opposed to only 65 basis points anticipated from the Fed.

The upcoming release of the minutes from the Fed’s last meeting on Tuesday is eagerly awaited, as it will shed light on the decision-making process behind the proposed cuts and future monetary policy directions. Additionally, this week will deliver critical inflation data for both the U.S. and European Union, which could further refine rate outlooks.

Investor sentiment in the UK has turned cautious following disappointing retail sales data, resulting in increased expectations for a potential rate cut by the Bank of England, likely positioned for February rather than December. Consequently, the pound touched a six-week low at $1.2484 on Friday, though it rebounded by 0.4% to $1.2591 on Monday, still falling short of last week’s high of $1.2714.

In the cryptocurrency market, Bitcoin is trading at $97,567, easing from last week’s record peak of $99,830 as profit-taking sets in ahead of the important $100,000 barrier. Bitcoin has surged over 40% since the recent U.S. election, driven by expectations of a more favorable regulatory environment under Trump’s administration.

As traders navigate these complex market dynamics, it remains crucial to monitor upcoming economic indicators and central bank communications, which will heavily influence both forex and broader financial market trends in the near term.

Image from Investopedia via Free Malaysia Today, licensed under CC BY 4.0.