The U.S. dollar strengthens on Monday, leaving its peers struggling at multi-year lows. A strong U.S. jobs report emphasized the economic resilience of the world's largest economy. The euro and New Zealand dollar both approached two-year lows, trading at $1.0242 and $0.5565, respectively.
The Australian dollar also faced challenges, hovering near its weakest point in over four years at $0.6139. Despite a minor recovery of 0.1%, it remains under pressure. The market saw reduced activity due to a holiday in Japan, further affecting liquidity.
Friday's jobs report showed unexpected growth in U.S. employment. The unemployment rate dropped to 4.1%, signaling a robust labor market. This data led traders to lower their expectations of Federal Reserve rate cuts for 2025.
According to Nick Rees from Monex Europe, "U.S. economic exceptionalism remains a key theme as we begin 2025." The combination of a stabilized labor market and inflation risks underlines the likelihood of an extended pause on rate cuts by the Federal Open Market Committee (FOMC).
Markets now predict only 27 basis points of rate cuts this year, down from 50 at the start of 2025. Expectations of fewer rate cuts stem from inflation risks tied to new economic policies under President-elect Donald Trump. His plans for tariffs, tax cuts, and immigration restrictions could stoke inflation further.
Upcoming U.S. inflation data, due Wednesday, will be a key focus for traders. An upside surprise could solidify the Fed's decision to hold back on easing measures. The dollar index remained steady at 109.67, its highest level since late 2022.
The yen weakened slightly against the dollar, trading at 157.92. However, speculation about the Bank of Japan's potential rate hikes tempered its decline. Reports suggest policymakers may revise inflation forecasts later this month, setting the stage for future tightening.
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