US Dollar Index displays a V-shape recovery to near 104.50 amid China’s Covid-inspired volatility

• The USD Index has witnessed traction amid a spike in Covid-19 cases in China.
• US Health Officials will impose mandatory COVID-19 tests on travelers from China.
• November’s Pending Home Sales showed the lowest reading in 20 years amid higher interest rates by the Fed.

The US Dollar Index (DXY) has sensed a mild selling pressure above 104.50 after a V-shape recovery move from the crucial support of 103.90. The USD Index witnessed a sheer responsive buying action after the spike in Covid-19 cases in China triggered a risk aversion theme in the global market. This led to a sheer fall in risk-sensitive assets like S&P500, which extended its downside journey with sheer momentum. While the return on 10-year US Treasury bonds climbed to 3.90%.

Risk-off triggers as China’s Covid cases spike

Chinese administration went to dismantle tight Covid-19 restrictions to reopen the economy to the fullest after levying curbs on the movement of men, materials, and machines for a longer period. The motive behind picking pace in the economy’s reopening was to ease supply chain disruptions to accelerate international trade. However, this resulted in a spike in Covid-19 infections and other countries returned to safety measures for travelers from China.

Health officials of the United States cited that the economy will impose mandatory COVID-19 tests on travelers from China, which has trimmed investors' risk appetite dramatically and has strengthened the US Dollar.

United States Pending Home Sales drop by 4%

The lack of economic data this week due to the festive mood has left a few triggers for the direction of the FX market. Therefore, investors are focusing on a handful of economic events. On Wednesday, the National Association of Realtors published the Pending Home Sales, which declined by 4% on a monthly basis in November while the street was expecting an expansion of 0.6%.

"Pending home sales in November 2022 recorded the second-lowest monthly reading in 20 years as interest rates by the Federal Reserve (Fed) have climbed to 4.5%, drastically cutting into the number of contract signings to buy a home," the National Association of Realtors said.