The dollar sell-off reflected spillovers from Japanese bond volatility and renewed sensitivity to fiscal risks, though a rebound in long-dated JGBs has eased pressure. -With Trump meeting EU leaders in Davos and signalling willingness to compromise, geopolitical de-escalation could lend the dollar modest support, ING's FX analyst Francesco Pesole notes.

Davos talks may offer Dollar support

"Yesterday’s dollar sell-off seemed to reflect a combination of spillover from JGB volatility and concerns about Europeans reducing their Treasury holdings. The volatility imported from Japanese bonds affected global fixed income across the board, but the FX reaction was not uniform. Higher bond yields – even when driven by foreign markets – tend to weigh on a currency when investors are already sensitive to that country’s fiscal sustainability."

"Long-dated Japanese bonds rebounded sharply overnight, lifting one source of USD downside risk for today’s European-US session. Incidentally, S&P500 futures are up 0.4% while European equities seem to be struggling to recover."

"Greenland will be the dominant theme today and there may be scope for de-escalation, offering the dollar some support. Trump is meeting EU leaders in Davos today, and if the past year has shown anything, it’s that face‑to‑face engagement tends to provide the best opportunity for tensions with the US president to ease. Before departing for Davos, Trump said: 'We’ll probably be able to work something out'."