**Forex Market Update: U.S. Dollar Maintains Strength Amid Diverging Policies**

The U.S. dollar remained resilient near its highest levels in over two years on Tuesday, continuing to reflect traders’ revised expectations around U.S. interest rates following strong economic indicators. Investors are showing reduced appetite for anticipated rate cuts in 2025, while concerns surrounding the UK’s fiscal health keep pressure on the pound.

As President-elect Donald Trump prepares for his presidential return next week, market participants are closely monitoring potential shifts in policies that could drive economic growth but also spark inflationary pressures. The introduction of new tariffs and the Federal Reserve’s cautious stance on monetary policy have both fueled an uptick in Treasury yields and supported the dollar, impacting currencies such as the euro, pound, yen, and yuan negatively.

Recent discussions about a gradual increase in U.S. tariffs have shifted market focus, particularly following reports hinting at a measured approach from U.S. policymakers. Paul Mackel, global head of forex research at HSBC, noted that Scott Bessent’s upcoming nomination hearing for U.S. Treasury Secretary will be pivotal, with potential discussion topics including currency management, tariffs, fiscal strategies, and the potential influence of a “shadow Fed” on economic outlooks.

As of Tuesday, the euro rose slightly to $1.0263, recovering from its Monday slump which saw it touch a low of $1.0177—its weakest point since November 2022. The euro has fell over 6% this year due to concerns over a widening policy gap between the Fed and the European Central Bank (ECB). George Saravelos from Deutsche Bank projected that the euro-dollar range for 2024 will likely be between 0.95 and 1.05, citing bearish trends driven by differing economic circumstances and fiscal policies.

The dollar index, which compares the U.S. currency against six major rivals, increased by 0.05% to 109.44, just shy of the recent peak of 110.17. After a robust job report last Friday supported the Fed’s cautious path regarding interest rates, investor attention has now shifted to upcoming U.S. inflation data, including both producer and consumer prices set to be released this week.

Market sentiment forecasts a modest 30 basis points easing this year, lower than the 50 basis points projected by the Fed back in December, reflecting concerns over inflation management. In tandem, U.S. Treasury yields surged to a 14-month high of 4.805% on Monday before stabilizing at 4.755% on Tuesday, indicating tightening economic conditions.

ING strategists have indicated that the combination of a strong dollar and climbing Treasury yields could impede foreign capital flows, echoing trends witnessed during the tariff-focused era of 2018-2019. The currency landscape’s focus appears to be shifting toward the dollar/yuan exchange rate, where the People’s Bank of China continues to implement measures to stabilize the yuan amidst mounting depreciation pressures. The yuan was trading at 7.3469 per dollar, showing little change from the previous close.

Meanwhile, the pound remains vulnerable as concerns over the UK’s fiscal stability weigh heavily on investor sentiment, trading at $1.2211 after bottoming out at $1.21 on Monday—the lowest point since November 2023. The Japanese yen held steady at 157.49 per dollar while traders prepared for next week’s Bank of Japan policy meeting, where expectations hinge on potential interest rate adjustments amid increasing wage pressures and scrutiny of the evolving U.S. monetary landscape.

As forex traders navigate these developments, keeping a close watch on upcoming data releases and central bank communications will be essential in gauging the future trajectory of currency pair dynamics.

Image from Freepik via Free Malaysia Today, licensed under CC BY 4.0.