US Dollar Index (DXY) retreats further from two-year top; bullish bias remains

• DXY trades with negative bias for the second straight day, though the downside seems limited.
• The Fed's hawkish shift remains supportive of elevated US bond yields and favors the USD bulls.
• Geopolitical risks and trade war fears might contribute to limiting losses for the safe-haven buck.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, drifts lower for the second straight day on Monday and retreats further from its highest level since November 2022 touched last week. The index retains its negative bias through the first half of the European session and currently hovers around the 108.70-108.65 area, down 0.25% for the day, though the fundamental backdrop warrants caution for bearish traders. 

The US ISM Manufacturing PMI improved from 48.4 to 49.3 in December, pointing to signs of economic resilience and potential for growth amid the optimism over US President-elect Donald Trump's expansionary policies. This, in turn, validates the Federal Reserve's (Fed) hawkish shift in December, signaling that it would slow the pace of interest rate cuts in 2025, which remains supportive of elevated US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond reached its highest point since May 2 and favors the USD bulls. 

Apart from this, persistent geopolitical risks stemming from the protracted Russia-Ukraine war and tensions in the Middle East, along with concerns about Trump's tariff plans, support prospects for the emergence of dip-buying around the safe-haven buck. Hence, any subsequent USD fall could be seen as a buying opportunity and remain limited ahead of this week's important US  macro releases, including the Nonfarm Payrolls (NFP) on Friday. In the meantime, traders on Monday might take cues from the final US Services PMI and Factory Orders data.