The U.S. dollar remained elevated near a 26-month high on Tuesday as strong economic data, rising Treasury yields, and fiscal uncertainties strengthened the greenback. Currencies such as the euro, sterling, yen, and yuan faced downward pressure as traders adjusted their outlook on U.S. monetary policy.
Key Market Drivers
- Trump’s Tariff Plans Raise Inflation Concerns
Investor sentiment was jolted after reports indicated that President-elect Donald Trump may declare a national economic emergency to implement new tariffs. This policy, if enacted, could further stoke inflation, driving U.S. yields higher. The 10-year Treasury yield touched 4.799%—a 14-month high—before settling at 4.7656%. - Focus on U.S. Inflation Report
After a robust non-farm payrolls report, market attention has shifted to Wednesday’s consumer inflation report. Traders are keen to see how inflation data will influence the Federal Reserve’s rate-cut trajectory for 2025. - Central Bank Policy Divergence
While the Federal Reserve signals a cautious stance, the Bank of Japan (BOJ) is deliberating a possible rate hike at its upcoming meeting, with a 57% probability factored in by markets. BOJ Deputy Governor Ryozo Himino emphasized that economic risks, both domestic and global, necessitate prudence. Meanwhile, the People’s Bank of China (PBOC) introduced measures to support the yuan, including bolstering foreign reserves in Hong Kong.
Currency Movements
- 🇪🇺 Euro (EUR/USD): Held steady at $1.0255, near its two-year low of $1.0177, amid weak regional growth concerns and tariff-related fears.
- 🇬🇧 Sterling (GBP/USD): Traded at $1.2211, recovering slightly from $1.21—its lowest point since November 2023. Rising U.K. gilt yields have sparked fiscal worries.
- 🇯🇵 Yen (USD/JPY): Stabilized at 157.55 per dollar after recent losses. Speculation of a BOJ rate hike lent support.
- 🇦🇺 Australian Dollar (AUD/USD): Climbed to $0.6192, bouncing back from its lowest since April 2020, supported by strong Chinese trade data and a rebound in commodity prices.
- 🇳🇿 New Zealand Dollar (NZD/USD): Increased by 0.47% to $0.5609, though still hovering near a two-year low.
- 🇨🇳 Offshore Yuan (USDCNH): Traded at 7.3472 per dollar, as Beijing’s intervention efforts continued.
Market Sentiment and Outlook
Market participants remain cautious as they brace for pivotal economic events, including the U.S. inflation report and Trump’s upcoming inauguration. ING analysts noted that the combination of a stronger dollar and higher Treasury yields could crowd out financial flows to emerging markets.
The Bank of Japan’s policy meeting and further U.S. economic data releases are expected to add more volatility to global markets. Traders should remain vigilant as fiscal and geopolitical developments unfold.
The dollar’s rally underscores the persistent impact of strong economic indicators, fiscal policies, and tariff uncertainty. Navigating these market dynamics will be crucial as central banks and investors adjust their strategies in the face of evolving global conditions.
