Morning Bid: Trump's talk downs the dollar

Market Reactions to Trump's Dollar Comments

A look at the day ahead in European and global markets from Tom Westbrook

Sometimes markets do listen to Donald Trump. After a long, grinding decline in foreign exchange volatility, the currency market has been lit up by a wave of dollar selling.

When Trump sounded nonchalant about it, telling a reporter that the dollar was "doing great," selling turned into a rout that sent the euro over $1.20 for the first time in more than 4-1/2 years and the Swiss franc to a 10-year top.

Geopolitical Factors Influencing the Dollar

There's a modest rebound underway, but the risk of dollar exposure in the Trump era is growing ever clearer.

Investor Strategies Amid Dollar Weakness

Geopolitics, Trump's policies, Washington wanting a lower exchange rate and worries over Fed independence all helped drag the dollar index down more than 9% last year.

And now with fresh nerves about his unsettling Greenland diplomacy, as well as hints the U.S. is willing to act with dollar selling to help Japan boost its yen -- investors want to hedge.

As TD Securities analyst Prashant Newnaha put it -- imagine holding Treasuries at 4%, but losing 10% on the dollar as a foreign investor.

Reuters reported last week that Australia's second-biggest pension fund, Australian Retirement Trust, is reducing dollar exposure through hedging, while hanging on to its U.S. investments. That sort of view helps explain how stocks have marched on to record peaks despite the swings in FX.

Effects on Gold and Other Currencies

The falling dollar helped gold to a new high above $5,200 an ounce and has lifted the Australian dollar over 70 cents.

Rates are giving the Aussie an extra boost and after data on Wednesday showed hotter-than-expected underlying inflation in December, markets put the chance of a rate hike next week at more than 70%.

All of Australia's "Big Four" banks now forecast a hike.

Central banks in the U.S. and Canada are seen keeping rates on hold later on Wednesday, leaving the focus on how Fed Chair Jerome Powell handles questions on the central bank's independence.

Earnings are due for Meta and Tesla after U.S. markets close.

Key developments that could influence markets on Wednesday:

- U.S. Federal Reserve meeting

- Bank of Canada meeting

- After-market earnings at Meta and Tesla

(Editing by Jacqueline Wong)