The U.S. dollar steadied on Thursday despite a sharp drop in U.S. bond yields after Wednesday’s inflation data as market focus shifted to Donald Trump’s inauguration and the potential inflationary impact of his policies. Meanwhile, the yen rose against the dollar and the euro as investors expected the Bank of Japan to raise interest rates next week.
Core inflation in the US fell to 0.2%m/m in December from 0.3% in November, as expected, while the annual reading of 4.2% came in below expectations of 3.3%.
Traders focused on inflation reacted positively by buying stocks and driving benchmark 10-year Treasury yields down more than 13 basis points.
The Senate Finance Committee will hold a hearing on future Treasury Secretary Scott Biscuit’s nomination, which is one of the day’s key events.
Biscent plans to maintain flexibility on the U.S. deficit and leverage tariffs as a negotiation tool to counteract the inflationary effects of the Trump administration’s economic policies.
There was no direct reaction in foreign exchange markets to the ceasefire agreement in Gaza, although the Israeli shekel touched its one-month high on Wednesday.
Analysts pointed out that the US consumer price data was better than expected, but still showing inflation at around 3%, still above the levels targeted by the Federal Reserve. The numbers provided Treasuries with an excuse to conduct some negative yield tests, but such a move is unlikely to go far.
“Inflation in basic services slowed in the December report, but overall core inflation remains above levels consistent with the Fed’s target,” said Alison Boxer, an economist at PIMCO, arguing that the US figures did not change their core inflation forecasts.
Dollar Rises on New Economic Policy Expectations
The imminent return of US President-elect Donald Trump to the White House and fading hopes of a drastic interest rate cut have pushed the dollar to multi-year highs, and investors see this strength as persisting, aided by the new administration’s pro-growth and inflationary policies.
The dollar index, which measures the dollar’s strength against six major currencies, has risen about 10% from its lows in late September to its highest level in more than two years.
Much of these gains have occurred since Trump’s victory in the November election, as investors scrambled to prepare their portfolios for the new administration’s trade and tariff policies, which are expected to provide support to the dollar in the short term while putting pressure on other economies and currencies.
Tariffs with their potential inflationary pressures could push the Fed to be cautious with interest rate cuts, even as trade tensions bleak the outlook for global economic growth and send more investors in search of a safe-haven dollar.
The higher US interest rates remain than yields in other advanced economies, the more attractive the dollar will be to investors.
While Trump has often complained that the dollar’s excessive strength weakens the competitiveness of U.S. exports and hurts U.S. manufacturing and jobs, his policies are often seen by the market as strengthening the dollar.
During Trump’s first term, the dollar rose about 13% from February 2018 to February 2020 when he implemented tariffs against several countries, including China and Mexico.
In another sign of the importance of dollar policy for the next administration, Scott Be scent, Trump’s choice to head the Treasury Department
US markets rise on inflation and dollar data
U.S. markets closed higher, with major indexes posting their biggest gains in more than two months. The rise was driven by weaker-than-expected inflation data (CPI, PPI) and strong bank earnings. While expectations of a rate cut by the Fed have increased, concerns about inflation and potential policy shifts have persisted under the incoming Trump administration.
In economic data, the consumer price index rose 2.9% year-on-year in December, up from 2.7% in November, in line with expectations. Monthly inflation rose 0.4%, the largest increase since March 2024, following November’s 0.3% gain.
Most sectors of the S&P 500 rose, with discretionary consumer goods, telecom services and financial services leading gains, while consumer staples closed slightly lower.
The Dow Jones Industrial Average rose 1.65% to close at 43,221.55, the S&P 500 closed up 1.83% at 5,949.91, and the NASDAQ Composite index gained 2.45% to close at 19,511.23.
Meanwhile, a perfect storm of positive factors strengthens the dollar, including significant improvements in the U.S. growth outlook and anticipation of a Federal Reserve rate cut.
Recent data showing U.S. job growth unexpectedly accelerating in December reinforced the Fed’s cautious approach to cutting interest rates this year, but Wednesday’s inflation data provided signs of easing underlying price pressures, prompting financial markets to bet on a June rate cut.
Aaron Howard, senior portfolio manager for currencies at State Street Global Advisors, said: “The US excels in terms of higher yields and better growth.”
Traders in the currency futures markets appear to be in a position to strengthen the dollar more with net bets on the dollar rising to a six-year high of $34.28, according to CFTC data.
