U.S. Dollar Rally Dries Up

The U.S. dollar kicked off the last week of 2016 in high spirits, buoyed by a record setting day for the Nasdaq Composite index, attractive Treasury yields, and a 15-year high in U.S. consumer confidence.

After four consecutive days lower the week prior, USD/JPY was stronger on Tuesday, climbing closer to 118.00.

But with trading volumes growing increasingly thin and year-end yen repatriation plaguing the dollar, the uptrend evaporated. A 10-month low in the pending home sales index was the catalyst for a reversal in the dollar, chasing USD/JPY away from 118.00.

The other dollar pairs also struggled as the yield spread between U.S. and Euro-zone government securities narrowed. The spread between the 10-year Treasury note and 10-year German bund narrowed 5 basis points on Wednesday, dampening demand for the U.S. dollar from yield-hungry investors.

As profit-taking ate into Wall Street gains late in the week, the dollar’s luster started to dim. USD/JPY retreated back towards a key Fibonacci retracement at 115.58, while the euro rose off the 2016 low of 1.3520 back towards 1.0500.

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