Dollar Gains Ground on First Day of the Year Due to Strong U.S. Yields

U.S. dollar made a solid comeback, thanks to strong U.S. yields. Investors were eagerly waiting for U.S. jobs data and European inflation numbers to get hints about what central banks might do.

The dollar index, which shows how the U.S. dollar is doing against other currencies, went up by 0.7%, making it the biggest jump in a single day since October.

After a 2% drop in 2023, breaking a two-year winning streak, the dollar bounced back because people thought the U.S. Federal Reserve would lower interest rates a lot this year, even though the economy is still strong.

The dollar's rise was supported by higher U.S. yields. The interest on benchmark 10-year notes went up by 7.1 basis points to 3.931%, marking the biggest daily increase in over three weeks.

Although there was concern last month about the Federal Reserve hinting at rate cuts in 2024, experts like Win Thin from Brown Brothers Harriman & Co think that "markets are realizing the U.S. economy is still strong." He thinks a soft landing might lead to 2-3 rate cuts in 2024, but the market is expecting six cuts this year, so the dollar could stay "under pressure and vulnerable" until that changes.

On the flip side, the euro dropped by 0.8% to $1.0956, reacting to data that showed Eurozone factory activity going down for the 18th month in a row. Meanwhile, sterling was at $1.262, down 0.81% for the day.

The Japanese yen also got weaker by 0.56% against the greenback, reaching 141.66 per dollar.

Investors are in for a busy week with lots of economic data, including European inflation data and U.S. data on job openings and non-farm payrolls. This information will help them figure out what the Fed and European Central Bank might do.

Minutes from the latest meeting of the Federal Open Market Committee, the group that sets rates for the Fed, are coming out on Wednesday. This will give more insight into what the central bankers are thinking.

According to the CME FedWatch tool, there's an 82% chance that the Fed will start cutting interest rates in March, with over 150 basis points of cuts expected this year.

Traders are also dealing with unpredictable oil prices because of worries about disruptions to Middle East supply after the latest attack on a ship in the Red Sea. But even this couldn't help the currencies of countries that export oil against the stronger dollar.

The dollar went up by 1.4% against the Norwegian crown and by 0.6% against the Canadian dollar. At the same time, the Australian dollar dropped by 0.44% against the greenback.

In the world of cryptocurrencies, the year started off with a bang. Bitcoin went up by 3.25%, reaching $45,912.48, its highest level since April 2022. This was because people expect the U.S. Securities and Exchange Commission to approve exchange-traded spot bitcoin funds soon.

Also Read: Year-End Twist: Dollar Hits 5-Month Low Against Euro Amid Fed Rate Cut Expectations