US Dollar Exchange Rates Gain as US Bond Market Dominates

January 9, 2025 - Written by Frank Davies

STORY LINK US Dollar Exchange Rates Gain as US Bond Market Dominates

The dollar has dominated over the past 24 hours with a particular focus on US bond yields.

Strong data helped put upward pressure on yields which also boosted the dollar while major uncertainties surrounding US trade policies continued and unsettled risk conditions.

The Pound to Dollar (GBP/USD) exchange rate failed to hold the 1.2500 level and dipped to just below 1.2450 on Wednesday.

ING commented; “For now, markets have been left guessing on tariffs, which allowed the US macro story to take over and unmistakenly offer support to the dollar.”

UoB expects near-term GBP/USD support just below 1.2440, but on a longer term it added; “Breach of key support and strong momentum indicate GBP/USD could decline further to April’s low of 1.2299.”

Tuesday’s US economic data was stronger than expected with the JOLTS release recording an increase in job openings to 8.10mn for November from a revised 7.84mn previously and above consensus forecasts of 7.73mn.

The ISM non-manufacturing index strengthened to 54.1 for December from 52.1 previously and above expectations of 53.5.

Within the data, the prices component strengthened to 64.4 from 58.2 and the strongest reading since March 2023.

The prices data triggered further anxiety over inflation trends.

ING commented; “a resurgence in inflation concerns could drive an even further hawkish tuning in the [Federal Reserve] policy message.”

Following the data, the chances of a January Fed rate cut declined further to below 5% with traders also pricing in less than a 40% chance of a cut in March.

The US 10-year yield increased to 4.70%, matching April 2024 highs and close to 14-month highs.

MUFG looked at other potential upward pressures on yields including the widening budget deficit; “The debt-servicing cost for the US government has now breached the USD 1trn level, which is more than the entire pre-covid federal budget deficit and in the first two months of the new fiscal year, the deficit is running 20% higher than in the same two months as last year (stripping out some timing distortions).”

Higher bond yields will tend to support the dollar in the short term, but is not without risks, especially as higher yields will hurt the economy.

MUFG noted potential risks to the growth conditions; “Our sense is that the economy is certainly not as strong as back then with the post-covid stimulus support no longer as supportive a factor for growth. That could mean the fundamental backdrop could deteriorate more notably on this occasion as financial market conditions continue to tighten.

The bank added; “we see increasing risks that rising UST bond yields could turn into a bigger negative feature for the markets that will mean good news becomes bad news which helps curtail dollar buying at these stronger levels.”

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TAGS: Pound Dollar Forecasts