The dollar rises toward its highest level in more than two years on Tuesday as strong economic data prompted investors to reduce bets on Federal Reserve (Fed) rate cutswhile possible US tariffs remain in the spotlight.
Following a jobs report on Friday that reinforced support for the Fed’s cautious stance, investors will be closely watching US inflation data, with producer prices (PPI) expected for Tuesday and consumer prices (CPI) on Wednesday.
Traders are pricing in 28 basis points of monetary easing by the Fed this year, less than the 50 basis points the Fed projected in December.
At the same time, the yields ofUS 10-year Treasuries hit a 14-month high of 4.805% on Monday before retreating. On Tuesday they fell 3 basis points (bps), remaining at 4.776%.
What the market analyzes about the dollar
“These data (from the PPI, which are in line with the consensus) should maintain demand for the dollar until tomorrow’s CPI, where we see some risks that the data will be more moderate than expected,” commented Francesco Pesole, currency strategist at ING, noting that markets expect an acceleration in the underlying indicator of producer prices, going from 0.2% to 0.3% monthly.
With President-elect Donald Trump set to return to the White House next week, lAttention has focused on its policies, which analysts expect will drive growth and price pressures.
The threat of tariffs, along with a lower likelihood of Fed rate cuts, has boosted Treasury yields and supported the dollar. However, on Tuesday the market focus once again turned to the possibility of US tariffs being gradually increased, following a new media report suggesting the US could take a measured approach.
“Scott Bessent’s nomination hearing for US Treasury Secretary on Thursday will be interesting, especially if he comments on the dollar and other currencies, possible tariffs, a shadow Fed, and the US fiscal outlook,” said Paul Mackel, global head of currency research at HSBC.
Bessent is expected to keep US deficits in check and use tariffs as a negotiating tool, mitigating the expected inflationary impact of US economic policy.
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The market monitors the possible effects of US tariffs and the evolution of inflation.
Photo: Pixabay
The euro rises 0.2%, standing at $1.0257. It hit $1.0177 on Monday, its lowest level since November 2022. The single currency fell more than 6% in 2024 on concerns over threatened tariffs and divergence in monetary policies between the Fed and the European Central Bank. .
“We project a range of 0.95-1.05 for euro/dollar this year and maintain a bearish stance,” said George Saravelos, global head of currency strategy at Deutsche Bank.
“The market is pricing in a terminal gap between the Fed and the European Central Bank of 200 basis points, compared to our view of 300 basis points due to divergent growth and fiscal outcomes,” Saravelos added.
The dollar index, which measures the US currency against six other currencies, rose 0.20% to 109.58, not far from the 26-month high of 110.17 reached on Monday. In October 2022, it reached a high of 114.78, its highest level since 2002.
“We still believe 2025 could be a tale of two halves, with dollar strength in the first half of the year and a partial or full reversal in the second,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
“Currently, the dollar is near multi-decade highs in overvalued territory, and investors’ elevated position supports this narrative,” he added.
The pound sterling was set to record its sixth consecutive day of decline against the dollar on Tuesday and hit a new 2-1/2-month low against the euro, as concerns over Britain’s fiscal challenges continued to weigh.
The yen falls 0.3% to 157.93 per dollar, with traders preparing for the Bank of Japan policy meeting next week, where markets are pricing in a 57% chance of an increase. “The BoJ’s intention here may be to keep its options open and the dollar/yen could play an important role,” said Derek Halpenny, head of global markets research at MUFG.
“A rebound in the dollar/yen and a rise in US yields following tariff announcements after (Trump’s) inauguration could be the green light for the BoJ to raise rates.”
Some analysts noted that the most important battleground in the currency market currently is the dollar/yuan, where the People’s Bank of China (PBOC) is still managing to hold the line even as depreciation pressure intensifies.
The yuan changed hands at 7.3474 per dollar on Tuesday, roughly unchanged from Monday’s close.
Source: Ambito

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