By Saqib Iqbal Ahmed

NEW YORK (Reuters) – U.S. President-elect Donald Trump’s imminent return to the White House and fading hopes for aggressive interest rate cuts have driven the dollar to multi-year highs, and investors see this strength continuing, aided by the new administration’s pro-growth and inflationary policies.

The , which measures the greenback’s strength against six major currencies, has surged nearly 10% from its late-September lows to a more than two-year high.

Much of these gains have occurred since Trump’s victory in the November election, as investors raced to prepare portfolios for the new administration’s trade and tariff policies, which are expected to offer near-term dollar support while pressuring other economies and currencies.

Tariffs with their potentially inflationary pressures could prompt the Fed to be cautious with rate cuts, even as trade tensions darken the global economic growth outlook and send more investors seeking the safe-haven dollar.

The longer U.S. interest rates remain higher than yields in other developed economies, the greater the buck’s appeal for investors.

While Trump has often complained that the dollar’s excessive strength blunts U.S. export competitiveness and hurts U.S. manufacturing and jobs, his policies are often viewed by the market as boosting the dollar.

During Trump’s first term, the dollar rallied about 13% from February 2018 to February 2020 when he implemented tariffs against several countries, including China and Mexico.

In a further nod to the importance of dollar policy for the incoming administration, Scott Bessent, Trump’s choice to head the Treasury Department, on Wednesday said he would ensure that the dollar remains the world’s reserve currency.

Traders in currency futures markets appear positioned for further dollar strength with net bets on the dollar rising to a near six-year high of $34.28, according to Commodity Futures Trading Commission data.

Against a weighted basket of several currencies, the dollar is the most overvalued it has been in 55 years, according to BofA Global Research.

Typically, such a significant rally would attract dollar bears anticipating a reversal, but few investors currently believe it is wise to challenge the rising dollar.

“We continue to see the dollar as fundamentally overvalued, but, at least in the near term, it is hard to come up with catalysts that would make the dollar weaken,” said Brian Rose, senior U.S. economist at UBS Global Wealth Management.

The presidential inauguration on Monday is one big reason holding back dollar bears, investors said. While the buck has rallied on expectations for broad tariffs, their details remain unclear.

“We don’t know how strong they’re going to be, how intense, how broad, how high,” said John Velis, head of FX and macro strategy for the Americas, at BNY Markets. Clarity on these fronts could further boost the dollar, making it perilous to bet against the currency even at these lofty levels.

Investors experienced how sensitive the dollar can be to tariff-related news on Jan. 6, when the dollar dropped about 1% against a basket of currencies following a Washington Post report suggesting that Trump’s aides were considering limited tariff plans. The dollar quickly rebounded after Trump denied the story.

So long as the tariff uncertainty lingers, investors will have a hard time abandoning their bullish dollar bets.

“I think people are waiting, at least for those important policy announcements, to get out of the way before closing out positions,” said Thierry Wizman, Global FX & Rates strategist at Macquarie.

On Monday, Goldman Sachs strategists, who forecast the dollar rising another 5% this year, said the buck could rally even more if the U.S. economy continues to outperform despite higher tariffs, and markets begin to price in possible Fed rate hikes instead of cuts.

Trump’s election campaign platform of aggressive tariffs and deportation of some immigrants has already sparked concerns among policymakers about inflation, minutes of the Fed’s meeting last month showed.

“You have had a pretty obvious shift in tone coming from the Fed towards more hawkishness,” Macquarie’s Wizman said.

In the interim, the dollar is well supported with a perfect storm of positive catalysts including significant improvement in the U.S. growth outlook and pared back expectations for Fed rate cuts.

Recent data showing U.S. job growth unexpectedly accelerated in December reinforced the Fed’s cautious approach to rate cuts this year, but inflation data on Wednesday offered signs of underlying price pressures subsiding, prompting financial markets to bet on a rate cut in June.

“The U.S. is outperforming both in terms of high yields and better growth,” said Aaron Hurd, senior portfolio manager, currency, at State Street (NYSE:) Global Advisors.

Treasury yields have risen in recent weeks with the U.S. 10-year yield surging to a 14-month high on strong economic data and expectations the Fed may be about done with rate cuts as it braces for the implementation of Trump’s policies.

While Hurd is positioned for dollar weakness in the three- to five-year timeframe, he is not ruling out further near-term gains for the U.S. currency. “There is still a little bit of room for dollar strength here,” Hurd said.

By Stefano Rebaudo

(Reuters) -The U.S. dollar steadied on Thursday despite the sharp fall in U.S. bond yields after Wednesday’s inflation data as market focus shifted to Donald Trump’s presidential inauguration next week and possible inflationary impact of his policies.

Meanwhile the yen rose against the dollar and the euro as investors expected the Bank of Japan to hike rates next week.

The – a measure of the value of the greenback relative to a basket of foreign currencies – was up 0.1% at 109.12.

“Markets are cautious before the inauguration because there is still policy uncertainty,” said Paul Mackel, global head of foreign exchange research at HSBC.

“If the risk of U.S. tariffs begins to materialize, the dollar will get another lift,” he added.

The highlight of the day should be the nomination hearing of Trump’s choice of Scott Bessent to head the Treasury Department.

Bessent, who will face questioning before the U.S. Senate Finance Committee, is expected to keep a leash on U.S. deficits and to use tariffs as a negotiating tool, mitigating the expected inflationary impact of economic policies expected from the Trump administration.

The U.S. inflation curve “has a well-identifiable 40 bps ‘hump’ over the next 12 months, which is near-identical to the estimated impact of a 5% universal and 20% China tariff starting as soon as Trump gets in office,” said George Saravelos, head of forex research at Deutsche Bank (ETR:).

“The market is pricing quick but moderate tariffs,” he added. “We see risks of slower but bigger tariffs.”

Traders who have been growing more worried about inflation responded with relief to Wednesday’s U.S. data, buying stocks and sending benchmark 10-year Treasury yields down more than 13 basis points. The currency reaction was more muted.

Analysts flagged that the U.S. consumer price data was better than expected, but still showing inflation above Federal Reserve targets. The figures provided the U.S. bond market with an excuse to do some downside testing for yields, but such a move is unlikely to go far.

“We still think that it will be easy for the Fed to remain on hold for now and wait for more data and fiscal policy clarity,” said Allison Boxer, an economist at PIMCO, adding that U.S. data did not change their forecasts for core inflation.

“We expect this to be the message (Fed) Chair (Jerome) Powell aims to communicate at the January meeting.”

There was little direct reaction in foreign exchange markets to the ceasefire deal in Gaza, though the Israeli did touch a one-month high on Wednesday.

The yen rose 0.46% against the dollar, after hitting 155.21, its lowest level since Dec. 19. It was up 0.51% against the euro at 160.19.

Recent remarks from Bank of Japan Governor Kazuo Ueda and his deputy Ryozo Himino have made clear that a hike will at least be discussed at next week’s policy meeting and markets see about a 79% chance of a 25 basis point increase, while pricing 50 bps of rate hikes by year-end. [IRPR]

“Yen strengthened on expectations for a rate hike, but now the focus is on what BOJ officials will say about the monetary policy outlook,” HSBC’s Mackel argued.

“They could signal a more gradual path for the future, which could limit yen gains.”

Japan’s annual wholesale inflation held steady at 3.8% in December on stubbornly high food costs, data showed on Thursday.

“Expectations of a BOJ hike and perhaps fears of more forex intervention in the 158/160 area have helped the yen outperform,” said Chris Turner, head of forex strategy at ING.

“We expect that to continue into next week’s BOJ meeting. However, dips may exhaust in the 153/155 area,” he said.

The euro was up 0.05% at $1.0294.

Sterling dropped sharply against the yen and also weakened versus the dollar and the euro on Thursday as investors focused on monetary policy divergence after last week’s selloff in gilts and the pound.

, seen on the front lines of tariff risk, was pinned near the weak end of its trading band at 7.3468 throughout the Asia session. [CNY/]