Dollar Strengthens as Traders Scale Back Rate Cut Bets
The US dollar is hovering near its highest level in over two years, driven by strong economic data and reduced expectations of interest rate cuts in 2025. As President-elect Donald Trump prepares to take office, investors are focusing on his policies, which are expected to boost growth but increase price pressures.
Tariff Threats and Fiscal Concerns
The threat of tariffs, combined with the Federal Reserve’s cautious approach to rate cuts, has lifted Treasury yields and the dollar, putting pressure on the euro, pound, yen, and yuan. However, a recent media report suggesting a measured approach to tariff increases has shifted market focus.
Currency Market Insights
Paul Mackel, global head of forex research at HSBC, notes that the nomination hearing of Scott Bessent for US Treasury Secretary will be closely watched, particularly for comments on the dollar, tariffs, and fiscal outlook. Bessent is expected to prioritize reducing US deficits and using tariffs as a negotiating tool, which could mitigate the inflationary impact of Trump’s economic policies.
Euro Under Pressure
The euro has dropped over 6% in 2024, driven by concerns about tariffs and monetary policy divergence between the Fed and the European Central Bank. George Saravelos, global head of forex strategy at Deutsche Bank, projects a euro/dollar range of 0.95-1.05 this year and remains bearish.
Dollar Index and Treasury Yields
The dollar index, which measures the US currency against six others, is hovering near a 26-month high. US Treasury 10-year yields have touched a 14-month high, driven by strong economic data and reduced expectations of rate cuts.
Global Market Implications
ING strategists warn that the combination of a strong dollar and higher Treasury yields is crowding out financial flows to the rest of the world, causing problems. They expect the dollar to remain strong throughout the year, with the dollar/yuan exchange rate being a key battleground.
Pound and Yen Under Pressure
The pound has been driven down by investor concerns about Britain’s fiscal sustainability, while the yen is bracing for next week’s Bank of Japan policy meeting, where a rate hike is possible.
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