Dollar Powers Ahead Amid Tariff Tensions and Rising Yields

Dollar Powers Ahead Amid Tariff Tensions and Rising Yields

The U.S. dollar extended gains on Thursday, driven by rising *Treasury yields, solid U.S. economic data, and speculation surrounding *President-elect Donald Trump’s potential tariff policies. The dollar index (DXY) rose to 109.11, near its two-year high, leaving the euro, sterling, and yen under significant pressure.


Key Market Drivers

  1. Trump’s Tariff Plans:
  • Reports from CNN indicated that Trump is considering emergency measures to implement sweeping tariffs, adding uncertainty to global markets.
  • The 10-year U.S. Treasury yield surged to 4.73% on Wednesday—its highest level since April—before settling slightly lower at 4.6628% on Thursday.
  1. Federal Reserve Outlook:
  • Minutes from the December FOMC meeting reaffirmed the Fed’s cautious stance, projecting two rate cuts for 2025, down from four previously forecasted.
  • Federal Reserve Governor Christopher Waller highlighted that inflation is expected to ease further, paving the way for gradual rate cuts.
  1. U.S. Economic Data:
  • Mixed ADP and jobless claims data suggest a cooling labor market ahead of Friday’s non-farm payrolls report.
  • Economists expect a 160,000 job increase for December, down from November’s 227,000 surge.

Currency Market Performance

  • Yen (USD/JPY):
    The yen hovered around 158.10 after touching a six-month low of 158.55 on Wednesday. Concerns are rising as the currency nears the 160 level that triggered intervention in *July 2024. Japan’s *Finance Minister Katsunobu Kato reiterated the government’s readiness to act if volatility persists.
  • Euro (EUR/USD):
    The euro slid to *$1.0305, close to the two-year low hit last week, as concerns over U.S. tariffs weigh heavily. ECB policymaker *Francois Villeroy emphasized that rates should reach neutral levels by summer if inflation subsides.
  • Sterling (GBP/USD):
    The pound fell nearly 0.5% to *$1.2303, marking its weakest point since April, amid market jitters over U.K. borrowing levels and 30-year gilt yields reaching a *26-year high.

Commodity and Bond Markets

  • Oil Prices: Fell over 1% as U.S. fuel inventories rose, with a stronger dollar adding downward pressure.
  • Gold: Edged up 0.1%, maintaining a cautious climb amid economic uncertainty.
  • Copper: Gained 1.8% as investors bet on continued industrial demand.

Market Sentiment and Risks

The evolving narrative around Trump’s tariff policies has left markets jittery, particularly for trade-sensitive currencies like the Canadian dollar and yen. The Bank of Japan is closely monitoring developments, with policy adjustments likely later this month.

With U.S. markets closed for the holidays, all eyes are on Friday’s jobs report, which could further shape expectations for the Fed’s next move.

Takeaway: The dollar’s dominance is supported by robust U.S. data and heightened geopolitical tensions. However, volatility looms as traders brace for potential intervention and Trump’s impending policy announcements.

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