Greenback Slips Amid Heightened Tensions over Greenland

[Ben Graham]

The US stepped up its attempt to secure Greenland for national security purposes, even though it has reduced its presence there. The latest attempt included a threat to impose 10% tariffs on several EU countries starting next month and would rise to 25% in June. This is too much for many EU countries and some retaliation is being considered. An emergency leader summit will be held later this week. President Trump appears to be using the International Emergency Economic Powers Act to authority to make the threat. Ironically, the Supreme Court could rule on the legality of its use later this week. The administration’s effort to secure Greenland also is spurring bipartisan opposition. Today is a national holiday in the US and the markets are closed. Note the Wednesday, the Supreme Court will hear the appeal on the president’s effort to fire Governor Cook from the Federal Reserve Board. 

The dollar has trading with a heavier bias and equities are mostly lower. The sell-off in JGBs following confirmation of a snap election in Japan next month does not appear to be spilled over and to spur a global move. Contrary to the pre-weekend speculation, there did not appear to be Japanese intervention on the exchange rate today. The heightened tensions between the US and Europe have helped lift the precious metals. It is hard to see the beneficiaries of the tension outside of Russia and China. 

Prices

G10

• The euro settled last week on a soft note, below $1.16 and eased below $1.1575 in early dealings today. It has not been here since the end of last November. However, the euro recovered fully as the dollar-negativity of the developments was appreciated. The euro reached $1.1640 before stalling. The pre-weekend high was a little above $1.1625, and a close above there complete the ostensibly bullish technical outside day. Options for 2.1 euros at $1.1585 expire today.

• The dollar’s pullback seen before the weekend to almost JPY157.80 was extended slightly through JPY157.45 today. Last week’s low was about JPY157.50. However, since the low was recorded the dollar rebounded to the session high near JPY158.15. Its recovery appeared linked to Prime Minister Takaichi calling for the much-rumored snap election for February 8. Fiscal policy remains her lead and has signaled her intention to maintain her commitment not to apply the sales tax on food for two years. Estimates suggest it could cost around JPY5 trillion ($31.6 bln). 

• Sterling opened a few ticks above the pre-weekend low ($1.3365) and quickly dropped to nearly $1.3330 before steadying. The $1.3300 area is roughly the halfway point of sterling’s rally from last November 21 low (~$1.3040) to a high early last month (~$!.3570). Sterling recovery and rose slightly through last Friday’s high (~$1.3415). A close above there and the 200-day moving average (~$1.3405) would appear constructive. 

• The Canadian dollar was sold to its lowest level before the weekend since early December, but it has steadied today. The US dollar reached nearly CAD1.3930 last Friday but returned to the pre-weekend low near CAD1.3885. Chart support is seen slightly below CAD1.3880, and a break of CAD1.3850 could boost confidence a greenback high may be in place.

• For the third consecutive session, the Australian dollar has been confined to a roughly $0.6665 to $0.6710 range. The daily momentum indicators are falling but a close above $0.6700, which it has not been able to do since last Monday, would be helpful. However, resistance in the $0.6715-30 area may be the more formidable hurdle.

EM

• The Mexican peso edged to a new high today in quiet turnover but has pushed slightly lower in European activity. The dollar reached its lowest level since July 2024 near MXN17.61. It recovered to around MXN17.67. Last Friday’s high was a little above MXN17.73. 

• The PBOC set the dollar’s reference rate at CNY7.0051 today, its lowest level since May 2023. The greenback slipped to about CNH6.9550. There has been talk in the markets for the past few months that Chinese officials were guiding the fix toward CNY7.0. It has almost been achieved. 

• The Indian rupee fell for the third consecutive session. The dollar reached INR91.00. The record-high set last month was about INR91.0835. Foreign banks and Indian importers have been buying dollars.

Other Markets

• Equities are having a tough day, though mainland Chinese stocks, and Taiwan and South Korea were among the large bourses that bucked the trend. Europe’s Stoxx 600 is off 1.4%, which if sustained would be the large drop since mid-November. US index futures are off 1.0%-1.5%. 

• Benchmark 10-year yields: The election announcement in Japan saw the 10-year JGB yield jump almost eight basis points to 2.25%. European yields are mostly narrowly mixed. In futures trading US yields are also lower despite the jump in JGB yields. 

• Gold and Silver have been bid to record highs. Gold reached $4690 and is now closer to $4967. Silver poked above $94 and is now near $93.30.

• March WTI eased to a five-day low around $58.55. The pre-weekend low was closer to $58.80, and it is straddling that area now. 

Data

• Canada reports December CPI today. Given the base effect, the 0.2% decline of the median forecast in Bloomberg’s survey would allow the year-over-year rate to hold steady at 2.2%. The underlying core rates have been firmer (2.8% in November) but central bank governor Macklem has suggested officials see the underlying rates as a bit exaggerated. The central bank said last month it is not sure the timing of the direction of the next rate adjustment. The market is convinced that the central bank is on the sidelines in the first half. The swaps market is discounting about a 60% chance of a hike before the end of the year. 

• Japan reported an 11% drop in core machine orders in November, which offset the 7.0% jump in October. The drop was around twice what the economists in Bloomberg’s poll projected. The final reading of November industrial output revised the poor, the preliminary estimate to a 2.7% decline rather than 2.6% decline. It follows a 1.5% gain in October. Industrial output slipped slightly in Q3. The tertiary industry index (services) slipped by 0.2% in November after a 0.8% increase in October. It rose a cumulative 0.1% in Q3. The BOJ meets at the end of the week, but officials have not prepared the market for a move, and the swaps market is confident that it will stand pat. 

• China reported the world’s second-largest economy grew by 1.2% in Q4 25 for a 4.5% year-over-year pace. The December details were mixed. On a year-over-year basis, retail sales slowed to 0.9% from 1.3%, the weakest since Covid, while industrial output rose 5.2% from 4.8% in November, the best in three months. Fixed asset investment contracted by 3.8% on a year-over-year year-to-date basis form a 2.6% drop in Q3. Residential property sales continued to slide on the same basis, while new and used house prices softened as they have since April 2023, the last time they increased. The peak though was around the middle of 2021.  

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