The US dollar weakened against other major currencies in Tuesday (27/December) trading. The rising market risk appetite is the cause. The Dollar Index or it is also known as DXY was down 0.21% at 104.11.

Market risk appetite mounted after the Chinese government said it would cancel COVID quarantine rules for foreign tourists. This is a positively considered step towards a full easing direction after the previous strict policy. 

The freedom of migrants from quarantine obligations will be effective on January 8, 2023. At the same time, Beijing authorities lowered the regulatory level of handling COVID

That was from category A to category B. This further confirms the Chinese government's commitment to gradually release COVID restrictions by 2023.

AUD is 0.25% Higher

There seems to be no sign of the Chinese government stepping up restrictions despite a surge in COVID cases. These conditions may demonstrate the Chinese government's determination to fully open restrictions in the near futurr.

It was said by Christopher Wong, OCBC currency strategist, in a note. Wong added that there are rumours that the Chinese government is preparing for an "extraordinary" move to boost the economy again. 

The Commodity Dollar strengthened significantly due to the dominating risk-on sentiment. The Australian dollar strengthened by 0.25 percent to touch 0.6748.

Elsewhere, the NZD/USD jumped by 0.65% in the 0.6311 range. Please note, both currencies are often used as proxies for the Chinese Yuan and tend to be in line with Chinese economic conditions.  

The Fed Rate Expectations Fade Again

In addition to being pressured by market risk appetite and the strengthening of the Commodity Dollar, the USD position was also overshadowed by expectations of a slowdown in the pace of the Fed's rate hike. 

The reason is that the release of some of the latest United States economic data shows that consumer spending barely rose in November. Meanwhile, inflationary pressures have been mounting. 

However, a number of analysts argue that the current weakening of the US Dollar could also be related to seasonal factors. One of them is Francesco Pesole as an ING currency analyst. 

He said that In line with the seasonal trend that has occurred in previous years, December is a weak month for the Greenback. That could be seen from some data released previously. 

USD/JPY is Strengthening 

The US dollar weakened against the majority of main currencies in Tuesday's trading (27/December). However, USD/JPY actually strengthened to touch a four-day high in the 133.50s. 

From a fundamental perspective, the bearish correction of USD/JPY is related to the improvement in market sentiment. That was as well as uncertainty in the direction of Japan's monetary policy.

The yen strengthened rapidly last week. That was after Japan's central bank (BoJ) abruptly widened its target range of 10Y government bond yields. 

USD/JPY also fell by four percent on the occasion. However, that pair tends to climb higher in the following days. The body size of the USD/JPY bullish candle is getting bigger and bigger, 

The Situation above continues to happen although it has not been able to reverse the previous significant slump. Two factors are likely becoming a trigger of the situation. 

First, the easing of COVID-19 quarantine rules in China has improved global market sentiment and reduced demand for safe haven assets such as the yen. Second, BoJ bosses refute market speculation about the prospect of a policy change in the near future.

Analysts have previously highlighted the possibility of monetary policy changes to tighter after the end of BoJ Governor Haruhiko Kuroda's term in April 2023. This will put further pressure on the USD/JPY. 

However, Kuroda on Monday said the central bank would continue to maintain ultra-loose monetary policy. This is definitely not one step towards a way out of ultra-loose monetary policy. 

The Central Bank will strive to achieve the price target in a sustainable and stable manner. It was accompanied by wage increases, by continuing monetary easing under the control of the yield curve or YCC.