HG MARKETS:

The U.S. dollar edged higher on Wednesday, buoyed by its safe-haven appeal as political uncertainty in Europe and South Korea, along with ongoing conflicts in the Middle East and Ukraine, dominated market sentiment. The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.1% to 106.46.

In Europe, the euro (EUR/USD) dipped 0.1% to 1.0501 as France braced for a pivotal no-confidence vote later in the day, which is widely expected to unseat Prime Minister Michel Barnier’s government. The opposition’s inability to back Barnier’s budget plan, aimed at addressing a significant deficit, has deepened the political crisis.

Adding to the euro’s woes, economic data revealed a sharp decline in eurozone business activity in November. The HCOB Composite Purchasing Managers’ Index (PMI), a key indicator of overall economic health, fell to 48.3 from 50.0 in October, signaling contraction in both the services and manufacturing sectors.

Meanwhile, in the U.K., the pound (GBP/USD) ticked up 0.1% to 1.2677, supported by economic data showing continued expansion in activity. Bank of England Governor Andrew Bailey reiterated expectations of gradual interest rate reductions over the next year, emphasizing that the process of reducing inflation is “well embedded.”

In Asia, the yen weakened significantly, with USD/JPY climbing 0.7% to 150.68. By contrast, the Chinese yuan rebounded, with USD/CNY slipping 0.2% to 7.2730 after a stronger-than-expected midpoint fixing by the central bank. This recovery follows the currency’s dip to a 13-month low earlier in the week.

The Australian dollar (AUD/USD) fell sharply, declining 1% to 0.6421, its lowest level since early August. This came after third-quarter GDP data revealed weaker-than-anticipated economic growth, fueling speculation that the Reserve Bank of Australia might cut interest rates early in 2025.

Market participants turned their attention to key U.S. economic data, including the ADP private payrolls report and the ISM services activity index, ahead of the highly anticipated non-farm payrolls report on Friday. Federal Reserve Chair Jerome Powell is also scheduled to speak in Washington, which could provide additional insights into the central bank’s monetary policy stance.

Analysts at ING highlighted the appeal of the dollar, noting that “a fragile coalition government in France, a lame-duck government in Germany, and political developments in South Korea reinforce confidence in the U.S. dollar as the most compelling currency for cash balances, given its relatively high interest rates and liquidity.”

Despite some risks of softer U.S. macroeconomic data, ING analysts noted that alternative defensive plays, such as the Japanese yen or Swiss franc, could be costly. The market-implied odds of a 25-basis-point rate cut at the Federal Reserve’s December 18 meeting currently stand at 75%, according to the CME FedWatch Tool.

The interplay of geopolitical tensions, shifting monetary policies, and mixed economic data continues to steer global currency markets, with the U.S. dollar remaining the preferred safe-haven asset amid heightened uncertainty.