Dollar stable, underpinned by rising yields, hawkish Fed minutes

The US dollar steadied Thursday, underpinned by rising Treasury yields after hawkish comments from the Federal Reserve and strong economic data furthered bets on a slower pace of rate cuts.

At 04:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely unchanged at 108.920, just shy of the two-year high it touched last week. 

Trading ranges are likely to be limited Thursday, with US traders on holiday to honor former President Jimmy Carter, with a state funeral due later in the session.  Dollar retains strength

The minutes of the Fed’s December meeting showed policymakers increasingly geared towards a slower pace of rate cuts in 2025 amid new inflation concerns, while recent jobs data has pointed to underlying strength in the labor market.

Additionally, Fed officials saw a rising risk that the incoming Trump administration's plans may slow economic growth and raise unemployment. 

This has seen the yield on the benchmark 10-year U.S. Treasury note hitting its highest level since April in recent days.

“The market now prices a pause at the 29 January meeting and does not fully price a 25bp cut until June,” said analysts at ING, in a note. “We have five Fed speakers later today, but the next big impact on expectations of the Fed easing cycle will be tomorrow's December NFP report, where some see upside risks.”

“Equally, the dollar is likely to stay strong into Trump's inauguration on 20 January.” German economic weakness weighs on euro

In Europe, EUR/USD fell 0.1% to 1.0306, remaining close to the two-year low it hit last week on recent signs of economic weakness, particularly in Germany, the region’s largest economy.

German exports and industrial production rose more than expected in November, according to data released earlier Thursday, but the outlook for the eurozone's largest economy remains weak.

Exports increased by 2.1% in November, while industrial production rose by 1.5% in November compared to the previous month.

However, "this rebound in industrial activity unfortunately comes too late to avoid another quarter of stagnation or even contraction," said Carsten Brzeski, global head of macro at ING.

The European Central Bank is widely expected to ease interest rates by around 100 basis points in 2025, and this, slough with concerns over US tariffs, could see the single currency fall to parity with the US dollar this year.

GBP/USD traded 0.5% lower to 1.2296, falling to its weakest level since April on concerns surrounding the UK bond market as British government bond yields hit multi-year highs.

“The gilt sell-off has … dented that confidence in sterling and the risk now is that sterling longs get pared as investors reassess sterling exceptionalism,” ING added. Yuan weakens after inflation data

In Asia, USD/CNY rose 0.3% to 7.3542, with the Chinese currency remaining close to its weakest levels in 17 years after consumer prices barely grew in December, while the producer prices shrank for a 27th consecutive month.

The print showed little improvement in China’s long-running disinflationary trend, and signaled that Beijing will likely have to do more to shore up economic growth.

USD/JPY dropped 0.2% to 158.08, with the Japanese currency boosted by average cash earnings data reading stronger than expected for November. 

The data furthered the notion of a virtuous cycle in Japan’s economy - that increasing wages will underpin inflation and give the Bank of Japan more impetus to hike interest rates sooner, rather than later. 

 

Source: Investing.com