Dollar Clings to Two-Year High as U.S. Economic Data and Tariffs Stir Markets

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The dollar remained near its highest level in over two years on Tuesday, driven by strong U.S. economic data that led traders to scale back expectations for rate cuts in 2025. Meanwhile, concerns about Britain's fiscal stability kept the pound weak.

With President-elect Donald Trump preparing to take office next week, focus has shifted to his policies, which analysts believe will spur growth but also increase inflationary pressures. The potential for tariffs and the Federal Reserve's cautious stance on rate cuts have pushed Treasury yields and the dollar higher, putting pressure on the euro, pound, yen, and yuan.

Prashant Newnaha, a senior strategist at TD Securities, noted that the market is now focusing on the possibility of gradual U.S. tariff hikes. He suggested that any continued discussions of tariffs during Trump's inauguration could lead to lower U.S. Treasury yields and a weaker dollar, while boosting U.S. equities.

The euro remained steady at $1.02475 but stayed near its two-year low of $1.0177. The yen traded at 157.54 per dollar, slightly recovering from last week's six-month low. The dollar index, which tracks the U.S. currency against six major peers, rose 0.16% to 109.59, just below its 26-month high of 110.17.

With a strong jobs report bolstering confidence in the Federal Reserve's cautious approach to monetary easing, traders are now looking ahead to the inflation report due Wednesday. Investors are currently pricing in a 29 basis point reduction in rates this year, less than the 50 basis points projected in December due to inflation concerns.

U.S. Treasury yields hit a 14-month high of 4.799% on Monday before pulling back to 4.7717% in early Asian trading. ING analysts expect the dollar to remain strong throughout the year, drawing parallels to the 2018-2019 tariff period. They noted that the current battleground in the forex market is the dollar-yuan pair, with the People's Bank of China (PBOC) taking steps to support the yuan by increasing dollar reserves in Hong Kong and encouraging more foreign borrowing.

The offshore yuan traded at 7.3465 per dollar, while the pound remained under pressure due to rising bond yields in the UK. Analysts anticipate that higher borrowing costs may force the British government to cut spending or raise taxes, potentially slowing economic growth. The pound traded at $1.2211 after hitting a low of $1.21 on Monday.

The Australian dollar was slightly up at $0.6184 after reaching its lowest point since April 2020, while the New Zealand dollar rose 0.3% to $0.55995, staying near its two-year low from the previous session.

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.