As the threat from the United States regarding the acquisition of Greenland has eased, global market tensions have been alleviated, leading to a stabilization in the U.S. dollar's trajectory while high-risk currencies have shown strength. Data indicates that the Norwegian krone and the Australian dollar, currencies which typically fluctuate with shifts in risk appetite, both rose more than 0.6% against the U.S. dollar on Thursday, leading the gains among major currencies. Market volatility indicators retreated, and U.S. Treasuries also began to stabilize following several days of intense selling. Valentin Marinov, Head of G10 FX Strategy at Credit Agricole, stated, "Although global geopolitical risks may still dominate foreign exchange market movements, the impact of such risks has likely peaked after U.S. President Trump signaled that the U.S. and Europe have reached an 'agreement framework'." He added that this situation could continue to boost the performance of risk-sensitive currencies while providing the dollar with a brief respite. The sharp fluctuations in the forex market this week serve as a classic example of a "TACO" trade, highlighting Trump's characteristic approach of first provoking market panic with strong threats, then concluding with a deal. However, the recent geopolitical stir over Greenland still serves as a wake-up call for the market: the event has not only disrupted long-stable global international relations but also reminds investors that vigilance remains necessary. Although the U.S. Dollar Index has stabilized, the dollar still faced significant pressure this week, with a cumulative decline of approximately 0.5%. Long-term volatility indicators suggest traders expect the current market calm to persist; however, influenced by next week's Federal Reserve monetary policy decision, the price of one-week volatility contracts has already begun to rise. Francesco Pesole, FX Strategist at ING, commented, "The Davos forum has mitigated geopolitical and tariff risks. As market focus shifts towards favorable macroeconomic fundamentals, the dollar may gain more support." He also noted that in the short term, the EUR/USD exchange rate could move towards the range of 1.16 dollars per euro. The recovery in the U.S. Treasury market has resonated with the easing of market volatility. The trading range for U.S. Treasuries this week is on track to be the second narrowest since 2021, while the ICE BofA MOVE Index, a measure of expected Treasury volatility, is also near its lowest point in over four years. Ahead of the Fed's decision, investor attention is turning to a series of U.S. economic data releases, including the core inflation indicator—the Personal Consumption Expenditures (PCE) Price Index—due later. If U.S. economic data continues to show robust performance, it will further support policymakers' stance of maintaining current interest rates, thereby providing a tailwind for the dollar. Some forex analysts caution that the dollar's rebound following Trump's reversal has been relatively modest. Evelyne Gomez-Liechti, Multi-Asset Strategist at Mizuho Securities, believes that the sudden emergence of this geopolitical conflict may further encourage a gradual shift of market funds away from dollar-denominated assets, a trend known as "dollar debasement trading." She stated, "The current global geopolitical landscape appears to have entered a new phase, and the repeated occurrence of such geopolitical disturbances may make cautious sentiment the norm for some market participants."
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