Dollar Retreats as Easing European Tensions Boost the Euro

Economic Indicators - The dollar index (DXY00) fell by -0.42% due to a stock rally that reduced liquidity demand for the dollar and euro strength following eased European tensions [1] - US weekly initial unemployment claims rose by +1,000 to 200,000, indicating a stronger labor market than the expected 209,000 [2] - Q3 GDP was revised upward by 0.1 to 4.4% (quarter-over-quarter annualized), surpassing expectations of no change at 4.3% [3] - November personal spending increased by +0.5% month-over-month, aligning with expectations, while personal income rose by +0.3% month-over-month, below the expected +0.4% [3] - The November core PCE price index rose by +0.2% month-over-month and +2.8% year-over-year, meeting expectations [3] Market Reactions - The euro (EUR/USD) rose by +0.54% amid dollar weakness, supported by President Trump's decision to refrain from imposing tariffs on European nations opposing his Greenland acquisition efforts [7] - The Eurozone January consumer confidence index rose more than expected to an 11-month high, contributing to the euro's gains [7] Federal Reserve and Interest Rates - The Federal Open Market Committee (FOMC) is expected to cut interest rates by about -50 basis points in 2026, while the Bank of Japan (BOJ) is anticipated to raise rates by +25 basis points in the same year [5] - The dollar is under pressure as the Fed increases liquidity in the financial system, having started purchasing $40 billion a month in T-bills since mid-December [6] - Concerns exist regarding President Trump's potential appointment of a dovish Fed Chair, which could negatively impact the dollar [6]