The US dollar is softening in the North American session. Rising US yields appear to be giving the greenback a thin slice of support against the Japanese yen, against which is it trading at a five-day high above JPY113.00.  

The fundamental backdrop seems more favorable for the dollar than the price action. It is not only the macro picture of fiscal stimulus and a favorable policy mix but also upside surprise in the recent string of data, including this week’s housing starts (best of the year) and existing home sales (strongest in a decade). These followed upside surprises in non-farm payroll growth and retail sales. Nor is market positioning a headwind for the dollar as it was a year ago when gross and net long speculative positions in the futures market were extreme.

The Dollar Index has been pushed through last week’s low, a little below 93.30, is in nearing important support just ahead of 93.00. A break would signal a move toward the 92.50-92.60 area, matching the lows of this month and last.The driver of the Dollar Index is the euro, of course. It is testing the air above $1.19 for the first time since the first of the month, when it peaked near $1.1940, after having been as high as $1.1960 in late November. We are suspicious of the price action being recorded in what appears to be very thin markets. A move back below $1.1870 would justify our skepticism. 

Sterling is moving higher after coiling in progressively narrower trading ranges to start the week. However, the high from the end of last week, almost $1.3450, remains intact. At the same time, the price action has reinforced the significance of the $1.33 floor.

The Australian dollar was turned back at the end of last week from $0.7700. It is consolidating in a narrow trading range this week, with support found near $0.7640. For the better part of the first half of December, Australia’s two-year yield slipped below the US two-year yield for the first time in 17 years. However, guided by the central bank, it appears the talk of a rate cut next year have been quashed, and the market has upgraded, on the margins a chance of hike next year. The two-year spread is now about eight basis points in Australia’s favor compared with a little less than five at the end of last week.