The US dollar rose on Monday, pushing other currencies to multi-year lows, after a strong US jobs report on Friday reinforced economic strength and clouded the prospect of a Federal Reserve interest rate cut this year.
The US dollar index, which measures the greenback against a basket of major currencies, surged to its highest level in more than two years on Monday, hitting a high of 110.17, extending its recent gains.
Data on Friday showed US job growth unexpectedly rose in December, while the unemployment rate fell to 4.1%. This has led traders to reduce their expectations for a Fed rate cut this year.
Markets are now no longer fully pricing in even one rate cut by the Fed in 2025, compared to the roughly two quarter-point cuts expected earlier in the year.
With the US inflation report due on Wednesday, any upside shock could close the door on future rate easing. Several Fed officials are also expected to speak this week.
“If you look at the past year, there were concerns that the labor market was showing signs of weakness, but it seems to have fully recovered,” said Dominic Bunning, head of FX G10 strategy at Nomura.
“The U.S. economy is strong enough to support a strong dollar and higher interest rates.”
Furthermore, expectations of less aggressive easing are also due to the view that President-elect Donald Trump’s plans for large import tariffs, tax cuts and immigration restrictions could increase inflation. He returns to the White House in a week.
The euro hit its lowest level against the dollar since November 2022 at $1.0177, while the pound was one of the worst hit, falling 0.7% to a 14-month low of $1.21.
The pound has been pressured by concerns about rising borrowing costs and Britain’s financial instability. It plunged 1.8% last week.
“The main view remains that the U.K. government may have to announce spending cuts on March 26,” said Chris Turner, head of global markets at ING.
“This will support a tighter fiscal narrative, looser monetary policy and a weaker pound.”
Elsewhere, the Australian dollar fell to its lowest since April 2020 at $0.6131. The New Zealand dollar was last trading at $0.5544, close to a more than two-year low.
Meanwhile, the Chinese yuan edged up on Monday after Beijing stepped up efforts to shore up the weakening currency by easing rules to allow more foreign borrowing and issuing verbal warnings.
The yuan strengthened 0.1% to 7.3576 per dollar.
Monday’s move by the People’s Bank of China followed a suspension of treasury bond purchases on Friday, which briefly boosted yields and sparked speculation that it was stepping up efforts to shore up the yuan.
“The PBOC is doing whatever it takes to maintain RMB stability,” said Christopher Wong, a currency strategist at OCBC.
China’s currency continued to be under pressure in part due to investor frustration over the lack of additional stimulus from Beijing to support its faltering economy.
The Japanese yen also strengthened by 0.2% to 157.37. The yen's decline was offset by news that Bank of Japan policymakers may raise their inflation forecast at this month's policy meeting in preparation for another rate hike.
