US Dollar Index struggles above 105.00 amid a risk-on mood, yields dived to near 3.4%

• The US Dollar is struggling to cross the immediate hurdle of 105.20 as the risk-on impulse has capped the upside.
• US Treasury yields dived, and S&P500 remained choppy amid escalating recession fears.
• A policy change by the FOMC from 2023 will result in a prolonged decline in the US Dollar.

The US Dollar Index (DXY) is facing barricades while attempting to cross the immediate hurdle of 105.20 in the Asian session. The upside in the US Dollar seems capped as the risk appetite of the market participants has improved significantly. Investors shrugged off uncertainty over higher interest rate peak guidance in December monetary policy meeting by the Federal Reserve (Fed) and poured funds into the risk-sensitive assets.

Yields refresh 11-week low amid escalating recession fears

US Treasury bonds remained in the spotlight as the street started talking about a recession in the United States on further policy tightening by the Fed. Investors parked their money into US government bonds to dodge recession fears. No doubt, the Fed policymakers have favored a slowdown in the interest rate hike pace from December but fresh evidence of strength in the United States economy led by a tight labor market and strong demand for the service sector has triggered the risk of a reversal in the inflation rate.

Concerns over forward recession weigh immense pressure on the returns from US Treasury bonds. The 10-year US Treasury yields refreshed its 11-week low near 3.4%. S&P500 remained choppy in Wednesday’s trading session despite investors underpinned risk-on traction.

US Dollar to shift in a prolonged decline from CY2023

The US Dollar has started facing pressure from market participants as investors believe that the Federal Open Market Committee (FOMC) will pause policy tightening moves from next year after reaching the neutral rate.

Economists at the National Bank of Canada believe that the greenback could recover some ground in the near term before sustaining a prolonged decline next year. They further added that a policy change from the FOMC in the first quarter of 2023 would set the stage for a more prolonged decline in the Greenback.