Dollar hits two-year high

The dollar hit a two-year high against major currencies on foreign markets on Tuesday, with the pound the biggest loser, as solid US jobs data released late last week prompted traders to cut interest rates, the Financial Times (FT) reported.

The Dollar Index, which tracks the US currency against a basket of major currencies, hit its highest level since November 2022. The euro also fell below $1.02, the single currency approaching parity with the dollar for the first time in more than two years. The euro fell 0.5% to $1.019.

"Official data showed 256,000 jobs were created in the US in December, beating analysts' estimates and raising further doubts about the need for the Fed to cut interest rates further this year," Lee Hardman, currency strategist at MUFG Bank, was quoted by the FT as saying.

Swap markets are now pricing in just one Fed rate cut in 2025, by a quarter of a percentage point, with some analysts even predicting the easing cycle is over.

"The US is dancing to a different tune to most of the rest of the world," said Guy Miller, chief investment strategist at Zurich Insurance Group, referring to strong US economic growth.

The pound sterling hit a 14-month low yesterday, falling 0.8% to $1.211, the weakest of any G10 currency.

UK government bonds fell, with the 10-year yield rising 0.04 percentage point to 4.88%, the FT reported. The yield was close to a 16-year high last week. British government bonds were hit by a global bond sell-off and concerns about the country's economy.

In a statement highlighting the divergence in monetary policy between the US and Europe, Philip Lane, chief economist at the European Central Bank (ECB), warned that eurozone inflation could exceed the 2% target if the region does not continue to cut interest rates. He argued that interest rates should not "stay too high, for too long" because growth could be so weak that "inflation could fall significantly below target."

Unlike current expectations of just one Fed rate cut this year, markets are anticipating three or four such moves by the ECB in 2025.