The dollar flirts this Tuesday with its highest level in over two years. Traders are reducing their bets on a U.S. rate cut in 2025 after solid economic data. Meanwhile, investor concerns about the UK’s fiscal health keep the fragile pound sterling in the spotlight. The threat of tariffs and the measured approach displayed by the Federal Reserve regarding rate cuts this year are driving up Treasury yields. Thus, the U.S. currency is putting pressure on the euro, pound sterling, yen, and yuan.
Trump’s policy supports the greenback
Investors closely monitor economic data to see if it supports the Fed’s cautious stance on rates. The Consumer Price Index (CPI) report is expected on Wednesday. « We already received the first inflation figures in the PPI this morning, and so far, markets are disappointed by this underperformance », said Helen Given, Associate Director of Trading at Monex USA, in Washington DC.
Traders now anticipate a first rate cut in September but at a level lower than the 50 basis points forecasted by the Fed in December. As President-elect Donald Trump prepares to return to the White House next week, attention has turned to his policies. According to analysts, these will stimulate growth and price pressures. The threat of tariffs and the reduction in Fed rate cuts are driving up Treasury yields and supporting the greenback.
Likely progression of U.S. stocks after Trump’s Inauguration
Even if the headlines persist after Trump’s inauguration, U.S. Treasury yields and the U.S. dollar will likely fall, while U.S. stocks will rise.
The euro remained stable at 1.02545 USD but hovers near its lowest level in over two years at 1.0177 USD, which it touched on Monday. The single currency is struggling at the beginning of the year after falling more than 6 % in 2024. Investors are concerned about the region’s weak economic growth and tariff threats.
The dollar index, which measures the U.S. currency against six other units, is up 0.16 % at 109.59, not far from the 26-month high of 110.17 reached on Monday. Employment figures released on Friday support the cautious stance of the U.S. central bank in favor of further monetary policy easing this year. Investors’ attention is now focused on the U.S. consumer inflation report, expected on Wednesday.
Traders are betting on a 29-basis-point easing this year, less than the 50-basis-point forecasted by the Fed in December when it shook the market with its measured approach to rate cuts due to inflation fears.
How are other currencies performing ?
The People’s Bank of China (PBOC) has unveiled a series of measures in recent days to support its weak currency. Notably, plans to place more dollars in Hong Kong to strengthen the yuan and improve capital flows by allowing companies to borrow more abroad.
The yuan traded at 7.3306 per dollar, slightly stronger than Monday’s close. The offshore yuan was at 7.3472. The pound sterling is in the crosshairs of international traders, with UK markets hit by rising bond yields. Higher yields often support the currency. However, British analysts expect that rising borrowing costs will force the government to limit spending or raise taxes to meet its fiscal rules, which could weigh on future growth.
The pound sterling reached 1.2211 USD in early trading after hitting 1.21 USD on Monday, its lowest level since November 2023. The yen remained stable at 157.55 per dollar, moving away from the nearly six-month low touched last week. Traders are preparing for next week’s Bank of Japan monetary policy meeting, where markets assess a 57 % chance of a hike.
The Australian dollar rose 0.26 % to 0.6192 USD on Monday, hitting its lowest level since April 2020. The New Zealand dollar also increased by 0.47% to 0.5609 USD, near the two-year low reached in the previous session.
