Dollar Higher on Rising Treasury Yields, Euro Lower on Weak Data

The U.S. dollar strengthened on Wednesday, supported by rising Treasury yields after positive U.S. economic data, while weak industrial orders in Germany weighed on the euro.

Today, the Dollar Index, which compares the performance of the U.S. dollar against a basket of six other currencies, was trading 0.3% higher at 108.690.

Dollar Rallies as Treasury Yields Soar

The dollar maintained its upward momentum on Wednesday, continuing the previous session’s rally after data revealed robust U.S. economic activity. Key data points included a surprising increase in job openings in November, low layoff rates, an accelerating services sector, and a sharp rise in a measure of input prices, which reached a two-year high.

These strong indicators pushed the 10-year Treasury yield to its highest level in eight months, while the 30-year yield neared the significant 5% threshold.

“Yesterday’s U.S. data releases were hawkish for the Fed, and the implied probability of a March rate cut has fallen below 40%,” ING analysts noted.

They added, “The standout metric was the ISM’s prices-paid subcomponent, which jumped to its highest level since January 2023. A resurgence of inflation concerns could prompt an even more hawkish shift in the Fed’s policy messaging.”

At its December meeting, the Federal Reserve reduced its expected rate cuts for the year to two, but market participants, according to LSEG data, currently forecast only 37 basis points of easing.

Later today, attention will turn to the ADP private payrolls report and weekly jobless claims, which will precede Friday’s much-anticipated U.S. employment report. These releases are expected to provide further insights into the health of the U.S. economy.

Weak German Economy Hits the Euro

In Europe, EUR/USD fell 0.2% to 1.0326, extending the previous session’s 0.5% decline after disappointing economic data from Germany, the Eurozone’s largest economy.

German industrial orders dropped 5.4% in November due to a decline in large orders, while retail sales fell by 0.6%, despite expectations of a boost from Black Friday and Cyber Monday promotions.

Investors anticipate that the European Central Bank will cut interest rates by about 100 basis points in the first quarter of this year, adding pressure on the euro.

“On today’s Eurozone calendar, focus on French central bank Governor Villeroy’s speech. EUR/USD can find good support at 1.0300 for now,” ING stated.

GBP Lags Amid Limited Data

GBP/USD dipped 0.2% to 1.2447, with little economic data on Wednesday apart from a speech by Bank of England Deputy Governor Sam Woods.

The Bank of England left interest rates unchanged last month, and further rate cuts this year are likely to proceed cautiously, given that inflation remains above target.

Confidence in the Yuan Continues to Show Weakness

In Asia, USD/CNY climbed 0.1% to 7.3511, following the Chinese yuan’s 17-year low earlier in the week.

Sentiment toward China remains fragile ahead of President-elect Donald Trump’s January 20 inauguration. Trump has reiterated plans to impose heavy tariffs on Chinese goods, fueling uncertainty about the country’s economic prospects.

Yen Contained by Verbal Intervention

USD/JPY edged up 0.1% to 158.19, rebounding slightly from six-month lows.

The yen managed to limit its losses after Japanese government officials issued verbal warnings about potential currency market intervention. This prompted traders to approach short positions on the yen with greater caution.