By Rae Wee and Harry Robertson
SINGAPORE/LONDON (Reuters) – The dollar fell on Monday from around a two-year peak, as traders reversed some of the rally seen during the holiday period ahead of key data this week, while China’s yuan dropped to its lowest level in 16 months.
In Canada, Prime Minister Justin Trudeau is increasingly likely to announce he intends to step down, though he has not made a final decision, a source told Reuters.
Markets appear to have largely priced that in and might welcome an election to clarify matters, leaving the U.S. dollar down 0.36% against its Canadian counterpart to C$1.4395.
Currencies slid against the dollar in thin trading over the holiday period as investors focused on the likely strength of the U.S. economy in 2025 and President-elect Donald Trump’s tariff policies.
The U.S. currency slipped on Monday, however, with the falling 0.48% to 108.44, down from a more-than-two-year high of 109.54 touched on Thursday.
“This week will see a return of normal market conditions and a pick-up in FX liquidity,” said Francesco Pesole, FX strategist at ING.
“That may lead to some softening in the dollar’s momentum, as the greenback could reconnect with the slight deterioration in its rate advantage over the holiday period.”
U.S. government bond yields stayed relatively steady over the holiday period while those of Germany, the euro zone’s benchmark, ticked higher.
The euro was last up 0.55% at $1.0368, taking it away from a 25-month low touched last week.
Meanwhile, sterling rose 0.52% to $1.2488 after falling to an eight-month low on Thursday.
Also in focus was the Chinese yuan, which on Friday weakened past the psychological level of 7.3 per dollar in the onshore market for the first time in 14 months, after the People’s Bank of China (PBOC) had aggressively defended that key threshold for most of December.
The slid to a 16-month low of 7.3301 per dollar.
“Weakness in the renminbi has accelerated recently in anticipation that President-elect Trump will move quickly to further raise tariffs on imports from China,” said Lee Hardman, senior currency analyst at MUFG.
He also cited “the sharp widening of yield spreads between the US and China which are encouraging a weaker renminbi”.
Prior to the market opening on Monday, the PBOC set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1876 per dollar.
U.S. DATA
Investors had their eye on Friday’s closely watched U.S. non-farm payrolls jobs report for December for further clarity on the health of the world’s largest economy.
A slew of Fed policymakers are due to speak this week and are likely to reiterate recent comments from their colleagues that the battle to tame inflation is not yet over.
The dollar has drawn strength from expectations of fewer Fed cuts this year,
