The dollar surged to a two-month high against major currencies on Monday, driven by a shift in traders’ expectations for aggressive rate cuts by the Federal Reserve following a robust U.S. jobs report.
The report exceeded market predictions, leading to a rise in U.S. bond yields and bolstering the dollar’s strength. Federal Reserve Chair Jerome Powell’s comments on Monday further contributed to the dollar’s rise, suggesting a measured approach to implementing interest rate cuts, prompting continued increases in Treasury yields.
During early Asia trade, Japan’s yen touched its lowest point since December at 148.82 per dollar before stabilizing at 148.43. Concurrently, the euro dipped to $1.0762, marking its lowest level since mid-December. The dollar index rose by 0.12% to 104.17, reaching its highest point since December 11.
Chris Turner, Global Head of Markets at ING, remarked, “Markets continue to be bounced around by data and central bank speak,” underscoring the impact of Friday’s strong U.S. jobs data on the Fed’s stance.
Powell’s interview on CBS’s “60 Minutes” emphasized the Fed’s cautious approach to rate cuts, considering the strong economy’s ability to gradually slow inflation. Charu Chanana, Head of FX Strategy at Saxo Bank, noted, “Reasons for a bullish USD trend continue to multiply,” calling for a reassessment of rate cut expectations.
Fed funds futures now indicate approximately 120 basis points of easing for the Fed in 2024, down from around 150 bps at the end of the previous year. The likelihood of a March cut has dropped to approximately 16%, significantly lower than the 50% estimate a week ago.
Sterling edged down to $1.2612, a two-week low, with little reaction to revised data showing the UK’s unemployment rate around 3.9% in the three months to November. The Australian dollar also declined to $0.6501, reflecting the changing market sentiment.
Treasury yields rose, fueled by expectations of higher U.S. rates in the long term. The two-year yield, indicating near-term interest rate expectations, increased by 8 basis points to 4.445%, following an 18 bps jump on Friday.
In global markets, China’s central bank continued efforts to stabilize its currency, using official guidance to set the yuan’s midpoint rate stronger than Reuters’ estimate. However, the onshore yuan struggled against the stronger dollar, closing at 7.1982 per dollar, its weakest since November 17.
The focal point of the economic calendar is the ISM non-manufacturing survey, providing insights into the U.S. economy’s health in January. Additionally, Monday’s data revealed that German exports fell more than expected in December due to weak global demand.
