Forex
Dollar set for biggest daily jump since October as U.S. yields rebound
© Reuters. U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
By Alun John
LONDON (Reuters) -The dollar rose on the first trading day of the year, supported by higher U.S. yields as attention turned to U.S. jobs data and European inflation numbers this week which may provide clues on central banks’ next moves.
The , which measures the U.S. currency against six counterparts, was last up 0.67% at 102.05, on track for its biggest daily percentage gain since October.
It fell 2% in 2023, snapping two years of gains due to investor expectations that the U.S. Federal Reserve will cut rates significantly this year while the economy remains resilient.
On the other side of the dollar’s ascent was the euro which dipped 0.74% as traders digested data showing euro zone factory activity contracted in December for an 18th straight month and sterling, off 0.64% at $1.2657.
The dollar also climbed against the Japanese yen, rising 0.96% to 142.16 yen.
Underpinning the dollar’s gains was a move higher in U.S. yields. The benchmark 10-year yield was last up 10 basis points at 3.963%. That would be its biggest daily increase in over three weeks, and comes after a 100 basis point drop in November and December.
Investors have a fairly busy week ahead with a slew of economic data including European inflation data and U.S. data on job openings and non-farm payrolls, which will help shape market expectations regarding monetary policy moves from the Fed and European Central Bank.
“Primary corporate issuance ($60 bn estimated in the US alone) could support this mean reversion in yields. Then FOMC minutes and payrolls will set the tone, and fine tune expectations for Jan and March FOMC meetings,” said Kenneth Broux senior strategist FX and rates at Societe Generale (OTC:).
Minutes from the most recent meeting of the Fed’s rate setting Federal Open Market Committee in December are scheduled for release on Wednesday and will provide further insight into the central bankers’ thinking.
Markets are now pricing in an 82% chance of interest rate cuts from the Fed to start from March, according to CME FedWatch tool, with over 150 basis points (bps) of easing anticipated this year.
Traders were also processing higher oil prices, with up over 2%, on fears of potential disruption to Middle East supply after the latest attack on a container ship in the Red Sea. [O/R]
That, however, could not help currencies of oil exporting hold off the stronger greenback. The dollar climbed 0.4% on the Norwegian crown and 0.2% on the Canadian dollar while the Australian dollar dipped 0.33%.
The euro did dip around 0.4% on both the and the however.
The crypto world started the year with a bang, with bitcoin touching a 21-month peak of $45,532 on rising expectations that the U.S. Securities and Exchange Commission will soon approve exchange-traded spot bitcoin funds.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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