U.S. Dollar Strengthens for Third Consecutive Session While British Pound Declines

By an Analyst

NEW YORK - The U.S. dollar has gained strength for the third straight day, even as Treasury yields have backed slightly off their recent highs. Investors remain concerned about potential tariffs that may emerge from the new administration under President Trump, which continues to impact currency valuations.

U.S. Treasury yields have been trending upwards, with the benchmark 10-year note reaching a peak of 4.73%—its highest level in eight and a half months—earlier this week. This rise in yields has been driven by a strong economy and renewed worries about inflation due to possible tariffs, leading the Federal Reserve to temper expectations about how quickly it will cut interest rates.

Recent data indicates that the labor market is performing well, and minutes from the Federal Reserve's December meeting indicate that officials are increasingly concerned about rising inflation, suggesting that Trump's policy plans could slow growth and elevate unemployment levels.

Market participants are looking ahead to Friday's critical government payroll report, which will offer insights into the potential speed of Federal Reserve interest rate cuts. Joseph Trevisani, a senior analyst at FX Street in New York, stated, “If tomorrow’s non-farm payrolls are stronger than anticipated, it's another sign that the economy isn't slowing down, which could add inflationary pressures.”

The U.S. Dollar Index, which measures the strength of the dollar against a basket of currencies, climbed by 0.12% to 109.15. Meanwhile, the euro dropped 0.16% to trade at $1.0301.

Federal Reserve Bank of Boston President Susan Collins remarked that the uncertain economic outlook necessitates caution in moving forward with interest rate reductions. In related remarks, Philadelphia Fed President Patrick Harker acknowledged the likelihood of some rate cuts but indicated no urgency given the current economic uncertainties.

Additionally, Kansas City Fed President Jeff Schmid noted that interest rates may be near an optimal level that neither restricts growth nor stimulates it excessively. This sentiment reflects a broader hesitance among lawmakers to make drastic changes based on the incoming administration's policies.

Turning to the British pound, it continues to face challenges, weakening by 0.46% to trade at $1.2306. This marks a third day of declines, reaching its lowest level since November 13, 2023. The UK finance minister is under scrutiny as rising borrowing costs, influenced by concerns surrounding Trump's economic policies, put pressure on the British government.

Bank of England Deputy Governor Sarah Breeden has expressed support for potential rate cuts based on recent evidence, although the timeline for such actions remains uncertain.

From a broader perspective, Erik Nelson, a macro strategist at Wells Fargo, has indicated that the pound may continue to struggle, particularly as UK gilt yields begin to decline.

The Japanese yen saw a slight increase of 0.17%, trading at 158.06 per dollar. Recent government reports revealed that real wages in Japan, adjusted for inflation, fell for the fourth consecutive month in November, a trend influenced by rising prices despite the most significant wage growth seen in over thirty years.

Analysts from Goldman Sachs have suggested that discussions at the recent branch managers' meeting lend support to their view of a potential rate hike from the Bank of Japan in January.

On a side note, the U.S. stock market was closed on Thursday in observance of former President Jimmy Carter's funeral, leading to an early closure for U.S. bond markets as well.

Dollar, Sterling, Economy