Dollar extends decline alongside yields, eyes on key US, EU data

Renewed optimism for a diplomatic solution to the Russia-Ukraine conflict allowed risk flows to dominate the financial markets on Tuesday and caused the greenback to lose interest. The dollar stays on the back foot early Wednesday as focus shifts to ADP Employment Change and Q4 GDP data from the US. The European docket will feature the German inflation report and eurozone sentiment figures as well. Additionally, investors will keep a close eye on geopolitical developments.

Following Tuesday’s talks, the Russian Defence Ministry announced that it will scale down military activity around Kyiv and Chernihiv. Moreover, one of the negotiators for Ukraine noted that they made enough progress to hold a meeting between Ukrainian President Volodymyr Zelenskyy and his Russian counterpart Vladimir Putin.

Although Pentagon said early Wednesday that Russia was moving troops around Kyiv instead of withdrawing them, the market action doesn’t yet point to an apparent negative shift in sentiment with US stock index futures trading flat on the day. The US Dollar Index, which lost 0.7% on Tuesday, is already down 0.3% near 98.00 and the 10-year US T-bond yield is losing 1.3% at 2.37%. On a similar note, the British military intelligence argued that Russian forces were returning to Belarus to reorganize and resupply.

During the Asian trading hours, USD/JPY fell sharply toward 121.00. In response, the Bank of Japan (BOJ) announced that it has conducted an emergency market operation by offering to buy JPY100 billion worth of 10-25 year Japanese government bonds but the pair failed to stage a convincing recovery. Commenting on the latest market moves, BOJ Governor Kuroda noted that the cost of buying US dollars to purchase commodities was one of the main factors behind the recent JPY weakness.

EUR/USD reached its highest level in more than ten days at 1.1137 on Tuesday and snapped a four-day losing streak. The pair is clinging to modest daily gains above 1.1100 early Wednesday.

GBP/USD climbed above 1.3150 during the European trading hours on Tuesday but erased its daily gains to close flat near 1.3100. As of writing, the pair was trading in positive territory near 1.3120.

Gold plunged to its weakest level since late February at $1,890 on Tuesday. With US Treasury bond yields turning south, XAU/USD reversed its direction during the American session and continued to edge higher early Wednesday. The pair was last seen posting modest daily gains above $1,920.

Despite the improving market mood, Bitcoin lost its bullish momentum on Tuesday and registered small daily losses. BTC/USD is trading flat near $47,500 so far on the day. Ethereum advanced to its highest level since early January at $3,483 on Tuesday before going into a consolidation phase near $3,400 early Wednesday.

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