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The dollar has been considered a consensus short trade since the end of 2018 on concerns that the U.S. Federal Reserve will pause in its interest rate increases. But it has been boosted in recent days by lack of growth in other regions, notably Europe.

“We still think the dollar’s gains may be overdone and the European Central Bank might offer some guidance later this week on when it will start to tighten monetary policy,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.

Market watchers say the dollar may also come under pressure as the U.S. government shutdown begins to weigh on domestic growth.

·       On Monday, the dollar .DXY rose to 96.472, its highest level since Jan. 4 and up more than 1.5 percent from a three-month low earlier this month.

·       The euro EUR=EBS struggled near a three-week low of $1.1361, down nearly 2 percent over the past two weeks from near $1.16 levels.

·       The dollar strengthened 0.3 percent versus the offshore yuan CNH=D3 to 6.8157. It has gained around 1 percent over the offshore yuan in the past seven sessions.

·       The yen JPY=EBS, another safe-haven currency, was steady against the dollar, fetching 109.64 in early trade. The Bank of Japan is expected to leave policy unchanged at its Jan. 22-23 meeting. Analysts expect monetary policy to remain accommodative in Japan this year.

“The slowing global economy and depressed oil prices are expected to force the BoJ to revise down its outlook for economic growth and inflation,” said Osamu Takashima, currency strategist at Citibank in a note.

·       USD/JPY stalled its sideways movement and cane under fresh selling pressure in the mid-Asian trades, now testing the key support at 109.50 levels amid risk-off. A break below the last could trigger stops, paving the way for a test of the 109 handle .

·       A surprising rally for China’s yuan over the turn of the year has been cut short by widespread expectations that Beijing will ramp up policy easing in coming months to avert a sharper economic slowdown.

·       The yuan CNY=CFXS has retreated to the weaker side of 6.8 per dollar this week, but is still up nearly 3 percent since early December on hopes that Washington and Beijing may be inching toward a trade deal.

The USD/CNH pair (offshore yuan exchange rate) has created a narrowing price range or a contracting triangle on the hourly chart.

The 50-hour moving average (HMA) is holding above the 200-HMA and is trending north in favor of the bulls. The ascending triangle breakout on the 14-hour relative strength index (RSI) also indicates that the path of least resistance is on the higher side.

USD/CNH, therefore, is likely to confirm a bullish breakout with a convincing move above the upper edge of the triangle, currently at 6.8075. That would open up upside toward 6.8450 (Dec. 5 low).

Trend: bullish above 6.8075

·       Weakness in the service and farm sectors slowed China’s economic growth in the fourth quarter, despite a strong pickup in construction activity, official data showed on Tuesday.

Services grew 7.4 percent from a year earlier, slowing from 7.9 percent in the third quarter, while growth in agriculture slowed to 3.5 percent from 3.6percent, the National Bureau of Statistics (NBS) said.

The sector-by-sector breakdown follows release of headline GDP figures on Monday that showed China’s economy in the last quarter expanded at its slowest rate since the global financial crisis due to faltering domestic demand and an ongoing trade war with the United States

·       British opposition Labour Party leader Jeremy Corbyn moved a step closer to paving the way for another referendum on European Union membership by trying to use parliament to grab control of Brexit from Prime Minister Theresa May.

After May’s Brexit divorce deal was rejected by 432-202 lawmakers last week, the biggest defeat in modern British history, some lawmakers are trying to take control of Brexit from May’s weakened minority government.

May on Monday proposed tweaking her deal, a bid to win over rebel Conservative lawmakers and the Northern Irish party which props up her government, but Labour said May was in denial about the crushing defeat of her plans.

·       Oil prices fell on Tuesday on signs that an economic slowdown in China, the world’s second-largest economy and oil consumer, was spreading, stoking concerns over future fuel demand.

The gloomy economic news has pulled down financial markets across Asia, including crude oil futures.

International Brent oil futures were at $62.26 per barrel at 0736 GMT, down 48 cents, or 0.8 percent, from their previous close.

U.S. West Texas Intermediate (WTI) crude futures were at $53.43 per barrel, down 0.7 percent, or 37 cents.

“Slowing manufacturing activity in China is likely weighing on demand,” said Singapore-based tanker brokerage Eastport, adding that industrial slowdowns tended to be leading indicators that fed gradually into lower demand for shipped oil products.

“This was the second downturn revision in three months, and we can still see further downgrades in near future if trade tensions escalate, the UK exits with a no-deal from the EU, or China’s economic growth drops more sharply,” said Hussein Sayed, chief market strategist at futures brokerage FXTM.

Despite the darkening outlook, oil prices have been getting some support from supply cuts started in late 2018 by the Organization of the Petroleum Exporting Countries (OPEC).