Dollar Strengthens on Robust US Jobs Data, Sterling Struggles Amid Economic Concerns
The US dollar continued its upward trajectory on Monday, buoyed by stronger-than-anticipated US jobs data released last Friday. The Dollar Index, which measures the greenback against a basket of six major currencies, climbed 0.4% to 109.930, reaching its highest point since October 2022. This surge comes as investors reassess the Federal Reserve’s monetary policy outlook for the year, with the robust jobs figures suggesting a more resilient US economy than previously anticipated.
Friday’s report revealed that US nonfarm payrolls grew by a significantly higher-than-expected number in December, while the unemployment rate dipped to 4.1%. This positive data has prompted market participants to scale back their expectations for Fed rate cuts in 2024. At the start of the year, markets were pricing in around 50 basis points of rate cuts, but this has now diminished to approximately 27 basis points.
The dollar’s strength is further underpinned by anticipation of the December US Consumer Price Index (CPI) data, scheduled for release on Wednesday. A higher-than-expected inflation reading could reinforce the notion that the Fed may not need to cut rates at all this year, potentially providing further support for the greenback. Analysts suggest that the combination of robust jobs data and potentially strong inflation figures could solidify the dollar’s upward trend in the near term.
Meanwhile, the British pound continues to face headwinds, falling 0.7% to 1.2117 against the dollar, marking a 14-month low. Growing concerns about the UK’s economic and fiscal outlook have weighed on sterling, contributing to rising borrowing costs. Market watchers are closely monitoring the upcoming release of the UK’s December CPI data, also due on Wednesday. Regardless of the outcome, analysts believe that sterling remains vulnerable, as persistent inflation could necessitate further action from the Bank of England, potentially adding further pressure on UK government bonds.
The euro also weakened against the dollar, declining 0.4% to 1.0195, its lowest level since October 2022. Market expectations suggest that the European Central Bank (ECB) will likely ease interest rates by around 100 basis points in 2025, with the bulk of the cuts occurring in the first half of the year, as inflation is projected to return to the ECB’s 2% target by mid-2025. However, some analysts speculate that certain central bankers might adopt a less dovish stance to bolster their currencies against the backdrop of a strengthening dollar. Despite the euro’s weakness, ECB Chief Economist Philip Lane has emphasized the importance of further rate cuts to ensure the ECB’s inflation target is met.
In Asian markets, the Japanese yen dipped 0.3% to 157.23 against the dollar, with trading volumes impacted by a public holiday in Japan. Uncertainty surrounding the outcome of a Bank of Japan meeting added to the yen’s weakness. The Chinese yuan edged up 0.3% to 7.3574 against the dollar, despite data showing better-than-expected export growth in December. This growth, however, is attributed to exporters accelerating shipments ahead of potential trade tariffs expected to be imposed by the incoming US administration. The prospect of these tariffs continues to loom over the Chinese economy.
