Forex
Dollar rises towards highest in over 2 years, euro up, yen falls
By Stefano Rebaudo
(Reuters) -The dollar rose towards its highest level in more than two years on Tuesday as strong economic data led investors to scale back bets on Federal Reserve rate cuts, while potential U.S. tariffs remained in the spotlight.
After a jobs report on Friday reinforced support for the U.S. central bank’s cautious stance, investors will closely watch U.S. inflation readings, with producer prices (PPI) due later on Tuesday and consumer prices (CPI) on Wednesday.
Traders are pricing in 28 basis points of Fed monetary easing this year, less than the 50 basis points the Fed projected in December.
U.S. Treasury 10-year yields touched a 14-month high of 4.805% on Monday before pulling back. They were down 3 basis points (bps) at 4.776% on Tuesday.
“That (PPI data in line with consensus) should keep the dollar in demand into tomorrow’s CPI, where we see some risks of a milder-than-expected print,” said Francesco Pesole, forex strategist at ING, flagging that markets expect an acceleration in the core producer price measure from 0.2% to 0.3% monthly.
With President-elect Donald Trump set to step back into the White House next week, the focus has been on his policies that analysts expect will boost growth and price pressures.
The threat of tariffs along with fewer Fed rate cuts priced in has lifted Treasury yields and supported the greenback.
However, on Tuesday the market focus returned to the chance that U.S. tariffs may be raised gradually, after a new media report suggesting the U.S. could take a measured approach.
“The nomination hearing of Scott Bessent for U.S. Treasury Secretary on Thursday will be interesting, especially if he makes any comments about the dollar and other currencies, potential tariffs, a shadow Fed, and the U.S. fiscal outlook etc,” said Paul Mackel, global head of forex research at HSBC.
Bessent is expected to keep a leash on U.S. deficits and to use tariffs as a negotiating tool, mitigating the expected inflationary impact of the U.S. economic policy.
The euro was up 0.12% at $1.0257. It touched $1.0177 on Monday, its lowest level since November 2022.
The single currency dropped more than 6% in 2024 as investors fretted about tariff threats and the monetary policy divergence between the Fed and the European Central Bank.
“We project a euro/dollar range of 0.95-1.05 this year and we stay bearish,” said George Saravelos, global head of forex strategy at Deutsche Bank (ETR:).
“The market is pricing a Fed-European Central Bank terminal gap of 200 bps compared to our view of 300 bps given divergent growth and fiscal outcomes,” Saravelos added.
The , which measures the U.S. currency versus six other units, was 0.20% higher at 109.58, not far from the 26-month high of 110.17 it reached on Monday. It hit 114.78 in October 2022, its highest since 2002.
“We still believe that 2025 could be a story of two halves, with dollar strength in the first half of the year, and a partial or full reversal in the second one,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
“The dollar currently (is) trading close to multi-decade highs in strongly overvalued territory and elevated investor positioning underpin this narrative,” he added.
UBS GWM sees the euro/dollar at 1.00 in March, 1.02 in June and 1.06 in December.
The British pound was poised to record a sixth consecutive day of decline against the greenback on Tuesday and touched a fresh 2-1/2-month low versus the euro as concerns about Britain’s fiscal challenges continued to weigh.
The yen dropped 0.3% to 157.93 per dollar, with traders bracing for next week’s Bank of Japan policy meeting where markets are pricing in 57% chance of a hike.
“The BoJ’s intent here may be to keep their options open and the dollar/yen could play a role here,” said Derek Halpenny, Head of Research Global Markets at MUFG.
“A jump in the dollar/yen and a move higher in U.S. yields on the back of tariff announcements after (Trump’s) inauguration may be the green light for the BoJ to hike.”
Some analysts flagged that the most important forex market battleground right now is the dollar/yuan – where the People’s Bank of China (PBOC) is still managing to hold the line even as depreciation pressure intensifies.
The PBOC has unveiled a flurry of measures in recent days to support its weak currency.
The yuan changed hands at 7.3474 per dollar on Tuesday, roughly unchanged when compared with Monday’s close.
Forex
Bank of America flags dollar longs as crowded, eyes global inflation concerns
Bank of America (BofA) analysts highlighted a shift in market sentiment, identifying long U.S. dollar positions as the most crowded trade, and now a significant headwind for the currency. This perspective aligns with BofA’s recent reports on the U.S. dollar, emphasizing the stark contrast between current market positions and historical trends.
The analysts’ findings indicate a growing apprehension among market participants regarding global inflation, particularly with a re-acceleration anticipated by 2025. Euro Area inflation expectations are notably visible, underscoring the broader concerns about inflationary pressures.
Additionally, while emerging market (EM) investors seem to have discounted the worst-case scenarios related to tariffs, the uptick in sentiment is perceived as tentative. The cautious stance of EM investors reflects the uncertainty and challenges in the global trade environment.
BofA’s analysis suggests that the heavy positioning in favor of the U.S. dollar could be problematic. The report, dated January 14, 2025, points out that the extent of USD long positions is exceptional not only in a historical context but also when compared to the past year’s trends.
Furthermore, the discrepancy between conviction and positioning is evident, as only a fifth of respondents consider long USD their highest conviction trade. This is despite 42% of those surveyed expecting the peak of 10-year U.S. Treasury yields to exceed 5%, as revealed in a separate exhibit from the bank’s research.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Forex
Go long USD/CNY ahead of Trump’s inauguration – UBS
Investing.com – Donald Trump’s inauguration is right around the corner, and UBS has advised its clients to go long the pair to hedge policy risks before the big day.
In a light data week, Trump’s inauguration will take center stage next week, according to analysts at UBS, in a note dated Jan. 16.
“While we don’t know what his first moves will be, we doubt it will be to levy big tariffs on day one. But that doesn’t mean markets won’t stop focusing on it. FX markets are not priced for large tariffs. Big tariff moves could still weaken the CNY more meaningfully, hurting pro-growth currencies such as the EUR,” the Swiss bank said.
Given the risks, volatility is likely to increase in the months ahead. Option volatility has already risen, though this is more due to diverging economic growth expectations between the US and the rest of the world and to country- specific issues like those in the UK and Canada. This means any market-negative developments should still lead to higher actual and implied volatility.
USD/CNY has reached new highs of late, trading at the upper limit of the fixing range, the Swiss bank said.
“We expect the yuan to face increased pressure once Trump firms up his tariff plans targeting China, which may lead the People’s Bank of China (PBoC) to permit further depreciation of the currency,” UBS added.
A weaker CNY against the dollar could help mitigate some of the negative impacts of any tariff hikes. Additionally, vulnerable domestic economic fundamentals are likely to weigh on yuan sentiment, contributing to higher FX demand and investment outflows.
“Overall, we like to be long , targeting a move toward 7.50 in the coming which could also provide positive carry of 2.1% p.a. We believe a stop-loss of 7.20 is prudent,” UBS said.
At 09:10 ET (14:10 GMT), USD/CNY traded marginally lower at 7.3289.
Forex
UBS rises its USD/JPY forecast
UBS revised its inflation forecast for Japan, projecting higher inflation rates in the coming years due to a robust US dollar and increased energy prices.
The UBS FX team adjusted their foreign exchange outlook, now expecting the exchange rate to hit 150 by the end of 2025, up from the previous estimate of 145. This adjustment is based on the backdrop of a strong US dollar.
The revised forecast anticipates a 0.1-0.2 percentage point increase in inflation for 2025 and 2026, driven by higher energy costs and consumer price index (CPI) goods. The core-core CPI, which excludes volatile fresh food and energy prices, is projected to remain above 2% through 2025.
UBS now expects it to reach 2.0% year-over-year at the end of 2025, a slight uptick from the previous estimate of 1.9%. UBS also highlighted that food inflation, currently at 4.2% year-over-year, is expected to stay at similar levels at least through the first half of the current year. This is attributed to the yen’s depreciation and unstable supply conditions.
The research firm notes that while service inflation has been relatively low at 1.5%, particularly due to weak housing rent and public services prices, an acceleration in overall service inflation is anticipated.
However, the development of inflation in specific service components, such as housing rent and public services, which respectively account for 37% and 25% of the weight in services within the inflation calculation, remains uncertain. U
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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