Forex
Rising dollar pressures peers as further Fed rate cuts questioned
By Samuel Indyk and Rae Wee
LONDON (Reuters) -The U.S. dollar rose on Monday, driving its peers to multi-year lows, after Friday’s blowout U.S. jobs report underscored the strength of the economy and muddied the outlook for further Federal Reserve rate cuts this year.
The , which measures the U.S. unit against a basket of currencies, surged to its highest in more than two years on Monday to peak at 110.17, extending the recent rally.
Friday’s data showed U.S. job growth unexpectedly accelerated in December and the unemployment rate fell to 4.1%, leaving traders heavily scaling back bets of Federal Reserve rate cuts this year.
Markets were now no longer fully pricing in even one rate cut from the Fed in 2025, down from roughly two quarter-point cuts priced at the start of the year.
With Wednesday’s reading on U.S. inflation up next, any upside surprise could further close the door on future easing. A slew of Fed officials are also due to speak this week.
“If you look back at the last year there were worries and signs that there were cracks in the labour market emerging, but they seem to have been fully plastered, not just papered over,” said Dominic Bunning, head of G10 FX strategy at Nomura.
“The U.S. economy is resilient enough to justify a strong dollar and justify relatively higher rates.”
Adding to expectations of a less aggressive easing cycle is the view that President-elect Donald Trump’s plans for hefty import tariffs, tax cuts and immigration restrictions could stoke inflation. He returns to the White House in a week.
The euro hit its weakest level against the dollar since November 2022 at $1.0177, while sterling was one of the biggest losers, sliding as much as 0.7% to a 14-month low of $1.21.
The pound has been under pressure from concerns over rising borrowing costs and growing unease over Britain’s finances. It tumbled 1.8% last week.
“The overriding view remains that the UK government will probably be forced to announce spending cuts on 26 March,” said Chris Turner, global head of markets at ING.
“This will feed into a tighter fiscal/looser monetary/weaker sterling narrative.”
Elsewhere, the Australian dollar sank to its weakest since April 2020 at $0.6131. The New Zealand dollar last traded at $0.5544, languishing near a more than two-year low.
BEIJING STEPS IN
The yuan meanwhile bucked the global trend and rose slightly on Monday after Beijing stepped up efforts to defend the weakening currency by relaxing rules to allow more offshore borrowing and sending verbal warnings.
The rose 0.1% to 7.3576 per dollar.
Monday’s moves by the People’s Bank of China follow its suspension on Friday of treasury bond purchases, which briefly lifted yields and spurred speculation it is stepping up defence of the yuan.
“The PBOC is doing whatever it takes to maintain RMB stability,” said Christopher Wong, a currency strategist at OCBC.
The Chinese currency has come under renewed pressure in part due to investors’ disappointment over the lack of further stimulus from Beijing to shore up its struggling economy.
Elsewhere, the yen similarly rose 0.2% to 157.37. The yen’s decline was mitigated by news that Bank of Japan policymakers could raise their inflation forecast at a policy meeting this month as a prelude to hiking rates again.
Investing.com– The Japanese yen exhibited minimal movement on Tuesday, despite Bank of Japan (BOJ) Deputy Governor Ryozo Himino indicating a potential hike in the upcoming policy meeting.
Himino suggested that the central bank might consider raising rates, citing sustained wage growth and expectations of a clearer U.S. policy landscape following President-elect Donald Trump’s inaugural address later this month.
The yen’s pair edged 0.1% higher to 157.62 yen on Tuesday.
In recent months, the BOJ has been adjusting its monetary policy to address rising inflation. In March last year, it ended its negative interest rate policy, and by July, it had increased the short-term policy rate to 0.25%.
These measures aim to achieve a stable 2% inflation target, supported by robust wage growth and a weakening yen, which have contributed to higher import costs.
Despite these developments, the yen’s exchange rate against the U.S. dollar remained relatively stable, reflecting market skepticism about the likelihood of an imminent rate hike.
Analysts suggest that while the BOJ is signaling a shift towards policy normalization, uncertainties surrounding global economic conditions and domestic wage dynamics may lead to a cautious approach.
Barclays (LON:) expects the central bank to implement rate hikes in March and October, with a terminal rate of 0.75%.
The BOJ’s next policy meeting is scheduled for January 23-24, where new growth and price projections will be discussed.
Investing.com — UBS strategists expect the US dollar “to stay stronger for longer,” citing robust US economic activity and ongoing tariff concerns impacting other regions.
Monday saw the (DXY) soar to its highest level since November 2022, trading above the 110 mark during the session. This represents a roughly 9% appreciation since late September.
The US dollar’s recent strength has been bolstered by better-than-expected domestic data, including nonfarm payrolls and the services sector purchasing managers’ index. These positive indicators have led to a decrease in the anticipated number of Federal Reserve rate cuts this year, with the consequent rise in US yields lending broad support to the USD.
While US economic data is expected to remain solid in the near term, the outlook for Europe is less optimistic, with subdued growth prospects.
Although growth in China is forecasted to accelerate to 5% year-over-year for the fourth quarter, the threat of US tariffs poses a significant risk. Political and economic uncertainties in South Korea, the European Union, and the UK have been linked to weakness in their respective currencies.
According to UBS, potential monetary policy divergence is among the key factors that could further propel the dollar upward in the near term.
While the Fed is expected to cut rates by a total of 50 basis points in the second and third quarters, the European Central Bank is projected to reduce rates by 100 basis points in the first half of the year.
“Policy divergence is a powerful driver of currencies, which leads to trending FX markets and the potential for overshooting exchange rates,” strategists led by Mark Haefele wrote.
The firm also points out that tariff risks may not be fully accounted for in the current USD valuation. Despite the dollar’s recent rally being largely attributed to solid US macroeconomic data, the introduction of new tariffs could drive the dollar even higher.
UBS suggests that if tariffs are implemented, the DXY could trade between 110 and 115, with significant impacts on other major currency pairs.
“If tariffs were to materialize, DXY could trade in a 110-115 range, could drop below parity, could slide below 1.20, and could move toward 0.94, in our view,” strategists noted.
However, the investment bank believes that the story of 2025 could be a tale of two halves, with the dollar strength in the first half of the year potentially reversing in the second half.
The current trading position of the USD, which is considered strongly overvalued and shows the highest level of dollar net length since 2015, supports this view.
UBS’s revised forecasts for the EUR/USD pair reflect this expected trajectory. Strategists expect the pair to trade at 1.00 in March, 1.02 in June, and 1.06 in December 2025.
In the case of China, despite the possibility of dramatically higher effective tariff rates, the CNY has only partially priced in this risk, with UBS reiterating its forecast for the to reach 7.50 by June.
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