Dollar Strengthens for Third Consecutive Session as Sterling Faces Continued Weakness

By Chuck Mikolajczak

NEW YORK (Reuters) - The U.S. dollar increased in value for the third successive session on Thursday. This rise occurred as Treasury yields experienced a slight dip yet remained at high levels, mainly due to apprehensions about tariffs associated with the upcoming Trump administration. At the same time, the British pound continued to show weakness.

U.S. Treasury yields have been climbing recently, with the benchmark 10-year note reaching an 8.5-month peak of 4.73% on Wednesday. This rise is attributed to a resilient economic outlook and concerns regarding potential tariffs, which have reignited inflation worries. Consequently, expectations are mounting that the Federal Reserve may adopt a more gradual approach to cutting interest rates.

Recent economic reports indicate that the labor market remains strong. Furthermore, minutes from the Federal Reserve's December meeting revealed that policymakers expressed renewed concerns over inflation, implying that the new administration's initiatives could hinder economic growth and boost unemployment levels.

All eyes are on the critical government payrolls report scheduled for release on Friday, as it is expected to provide insights into how aggressively the central bank may pursue interest rate cuts.

Joseph Trevisani, a senior analyst at FX Street, noted, "Most of the economic readings that have come in have been a little stronger than expected. If we receive a non-farm payrolls report tomorrow that surpasses expectations, it will indicate that the economy is not cooling down and that inflation pressures may intensify."

He also remarked on the forthcoming changes expected with the Trump administration.

The U.S. Dollar Index, which assesses the greenback against a basket of currencies, rose by 0.12% to 109.15. Meanwhile, the euro fell by 0.16% to $1.0301.

On Thursday, Federal Reserve Bank of Boston President Susan Collins stated that the considerable uncertainty surrounding future economic conditions calls for a cautious approach to rate cuts. Similarly, Philadelphia Federal Reserve President Patrick Harker acknowledged the likelihood of rate cuts but indicated that an immediate reduction is unnecessary given the existing uncertainties about the economic landscape.

Kansas City Federal Reserve President Jeff Schmid expressed that rates are nearing a balance where the economy requires neither restrictive nor supportive measures. Fed Governor Michelle Bowman further commented that the implications of the incoming administration's policies should not be preemptively judged.

In the currency market, the British pound weakened by 0.46% to $1.2306, marking three consecutive days of decline. This decline follows its lowest point since November 13, 2023, amid growing concerns over the policies of the incoming Trump administration, which have escalated borrowing costs for the British government.

Bank of England Deputy Governor Sarah Breeden mentioned that recent evidence supports the need for a rate cut, although the pace remains uncertain.

Erik Nelson, a macro strategist at Wells Fargo, has indicated a potential risk for continued underperformance of the pound as UK gilt yields seem to be turning lower.

The Japanese yen appreciated by 0.17%, trading at 158.06 per dollar. Latest governmental data revealed that Japan's inflation-adjusted real wages declined for the fourth consecutive month in November, despite base pay growing at the fastest rate in over three decades.

Analysts from Goldman Sachs are of the opinion that discussions from the January branch managers meeting lend support to their forecast of a rate hike from the Bank of Japan.

On Thursday, the U.S. stock market was closed, and bond markets were set for an early close due to the funeral of former President Jimmy Carter.

Dollar, Sterling, Treasury