The US dollar rose on Monday, driving its peers to multi-year lows, following a strong US jobs report that highlighted the strength of the economy and reduced expectations for further Federal Reserve rate cuts this year.
The dollar, which measures the US unit against a basket of currencies, surged to its highest level in over two years, reaching 110.17. The strong jobs report showed US job growth unexpectedly accelerate in December, with the unemployment rate falling to 4.1%, leading traders to scale back bets of Federal Reserve rate cuts in 2025.
Market participants are now no longer fully pricing in even one rate cut from the Fed this year, down from roughly two quarter-point cuts priced at the start of the year. With the next reading on US inflation due next week, any upside surprise could further close the door on future easing.
Fed officials are also scheduled to speak this week, adding to the market uncertainty. Dominic Bunning, head of G10 FX strategy at Nomura, noted that the US economy is resilient enough to justify a strong dollar and relatively high interest rates.
The euro hit its weakest level against the dollar since November 2022, while the pound fell as much as 0.7% to a 14-month low against the dollar. The Australian and New Zealand dollars also sank to their weakest levels since April 2020 and more than two years ago, respectively.
The Chinese yuan, however, bucked the trend and rose slightly after Beijing took steps to defend the weakening currency by relaxing rules to allow more offshore borrowing and sending verbal warnings. The move came as the People’s Bank of China suspended treasury bond purchases on Friday, lifting yields and sparking speculation about a possible defense of the yuan.
The yen also rose 0.2% to 157.37, with some market participants expecting the Bank of Japan to raise its inflation forecast at a policy meeting this month as a prelude to hiking rates again.