Dollar Strengthens for Third Consecutive Session Amid Ongoing Sterling Decline

By Chuck Mikolajczak

NEW YORK (Reuters) -The U.S. dollar has gained strength for the third consecutive session on Thursday, even as Treasury yields saw a slight dip but remained at high levels. This trend comes amidst concerns over tariffs anticipated from the incoming Trump administration, while the British pound continues to show signs of weakness.

U.S. Treasury yields had been rising, with the benchmark 10-year note reaching an 8-1/2 month peak at 4.73% on Wednesday. The robust state of the economy paired with looming tariffs has reignited worries about inflation and has led to higher expectations that the Federal Reserve will slow down the pace of interest rate cuts.

Recent economic indicators have exhibited a stable labor market. Additionally, minutes from the Federal Reserve's December meeting reflected that policymakers expressed new concerns about inflation, warning that the new administration's policies could hinder economic growth and potentially raise unemployment rates.

Investors are now looking forward to Friday's crucial government payroll report, which will help determine how aggressive the central bank might be regarding interest rate adjustments. "Most of the economic readings that have come in have been a little stronger than expected, so if we get a non-farm payrolls tomorrow that is also unexpectedly strong, it will signal that the economy is not cooling off, which could elevate inflation pressures," shared Joseph Trevisani, senior analyst at FX Street in New York.

He further mentioned, "We will also have the Trump administration that is about to introduce various changes."

The dollar index, which measures the greenback against a basket of currencies, increased by 0.12% to 109.15. Meanwhile, the euro fell by 0.16% to $1.0301.

On the Federal Reserve's side, Bank of Boston President Susan Collins stated that the current high level of uncertainty about the economic outlook necessitates a cautious approach to future rate cuts. Similarly, Philadelphia Federal Reserve President Patrick Harker shared that while he still anticipates rate cuts, an immediate reduction is not urgently required due to the existing economic uncertainties.

Furthermore, Kansas City Federal Reserve President Jeff Schmid indicated that interest rates are approaching a level where the economy does not require either restriction or support. Fed Governor Michelle Bowman emphasized that the policies of the new administration should not be overly prejudged.

As for the British pound, it has weakened by 0.46% against the dollar, now valued at $1.2306, marking its third consecutive day of decline after reaching its lowest level since November 13, 2023. This deterioration comes as the British finance minister faces pressure due to rising borrowing costs influenced by anxieties surrounding Trump's forthcoming policies.

Bank of England Deputy Governor Sarah Breeden noted that recent evidence supports a potential rate cut, although the timing of such a move remains uncertain. Erik Nelson, a macro strategist at Wells Fargo, warned of possible sustained underperformance of the pound as UK gilt yields begin to decline.

In more global terms, the Japanese yen appreciated by 0.17% to 158.06 per dollar. Recent data indicated that Japan's inflation-adjusted real wages have dropped for the fourth month in a row as rising prices outpaced base pay growth, which, however, saw its fastest rise in over three decades.

Analysts at Goldman Sachs perceive the January branch managers' meeting discussions as indicative of their stance predicting a rate hike by the Bank of Japan this month.

It's worth mentioning that U.S. stock markets were closed on Thursday, while U.S. bond markets were also set for an early closure to observe the funeral of former President Jimmy Carter.

Dollar, Sterling, Yields, Inflation, Economy