The buck fell yesterday for the first time in a week as the euro continued to press higher as rising global equities support risk appetite. What could have been a large dollar positive in the form of China hiking its key interest rate turned out to be little more than a blip in a choppy day of trade as currency markets largely took the hike in their stride. The buck did find support yesterday from both Fed Lacker and Fisher who suggested that QE2 needs to be seriously reviewed considering the brighter outlook in the US economy, and rate hikes should be implemented at the first sign of inflation. However, this supportive comments weren't enough to erase the greenback's decline against its peers and the index ultimately closed lower. Over-night trade has been relatively quiet with many investors across Asia still digesting the China rate hike and awaiting further data.

Looking ahead, the more hawkish comments from Fed officials yesterday could be the beginning of a changing stance of the Fed with new members having rotated in at the New Year. A more hawkish Fed, one that is willing to address the merits of completing QE2 and potentially hike rates if inflationary pressures emerge will be positive for the buck and should give the beleaguered currency a much needed lift.

Written by Jonathan Granby, DailyFX Research Team

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