Dollar Climbs for the Third Straight Session as Sterling Weakness Persists

By Chuck Mikolajczak

NEW YORK - The U.S. dollar showed steady strength for the third consecutive session on Thursday. This increase occurred even as Treasury yields dipped, indicating elevated worries concerning trade tariffs set to arrive with the new Trump administration. Meanwhile, the British pound faced ongoing weakness.

U.S. Treasury yields have been generally rising, with the benchmark 10-year note reaching an 8.5-month high of 4.73% on Wednesday. Market watchers attributed this surge to a robust economy and anticipated tariffs, which reignited concerns about inflation and influenced expectations that the Federal Reserve might take a more gradual approach to interest rate cuts.

Recent economic indicators have painted a picture of a stable labor market. Minutes from the Federal Reserve's December meeting hinted at new inflation worries, suggesting that the upcoming administration's policies might decelerate economic growth while potentially raising unemployment levels.

Traders will be looking closely at Friday's crucial government payrolls report to assess the central bank's aggressiveness in cutting interest rates. Joseph Trevisani, a senior analyst at FX Street in New York, stated, "Most of the economic readings that have come in have been a little stronger than expected, so if we get a non-farm payrolls figure tomorrow that's above expectations, it will suggest that the economy is not cooling off, thereby increasing inflation pressures."

"We’re also going to get the changes coming from the Trump administration," Trevisani added.

The U.S. dollar index, which gauges the greenback against a selection of currencies, rose by 0.12% to 109.15. Conversely, the euro fell 0.16%, trading at $1.0301.

Federal Reserve Bank of Boston President Susan Collins mentioned that considerable uncertainty surrounding economic prospects advises a cautious approach regarding future rate cuts. Philadelphia Federal Reserve President Patrick Harker echoed this sentiment, expressing that while he anticipates rate cuts, immediate action isn’t necessary considering the prevailing economic uncertainty.

In his comments, Kansas City Federal Reserve President Jeff Schmid observed that interest rates are approaching a neutral level, where the economy needs neither restrictions nor support. Additionally, Fed Governor Michelle Bowman indicated it’s too soon to form views on the future policies of the incoming administration.

The British pound weakened by 0.46% to $1.2306, marking a third day of declines. This followed a dip to its lowest level since November 13, 2023. Concerns regarding potential policies from Trump have led to increased borrowing costs for the British government, putting pressure on the country's finance minister.

Bank of England Deputy Governor Sarah Breeden acknowledged that recent evidence supports a potential rate cut, yet it remains unclear how quickly such a move could occur.

Erik Nelson, a macro strategist at Wells Fargo, believes there is a risk of ongoing underperformance in the pound as UK gilt yields start to decrease.

The Japanese yen saw a slight gain, strengthening by 0.17% to 158.06 per dollar. Government data revealed that Japan's inflation-adjusted real wages dropped for the fourth consecutive month in November due to rising prices, despite base pay increasing at the fastest rate in over 30 years.

Analysts from Goldman Sachs are confident that outcomes from the January branch managers meeting support their predictions of a rate hike from the Bank of Japan.

On Thursday, the U.S. stock market remained closed, and bond markets were prepared for an early close due to former President Jimmy Carter's funeral.

Dollar, Sterling, Economy