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The dollar hit a two-year high against major currencies on Monday, while the pound fell by its biggest margin since strong U.S. jobs data late last week prompted traders to lower expectations of further interest rate cuts from the Federal Reserve.
The dollar index, which tracks the U.S. currency against the yen, euro and other major currencies, reached its highest level since November 2022.
Friday’s U.S. jobs report showed 256,000 jobs were added in December, surpassing the consensus and “raising more doubts about whether the Fed will need to keep interest rates low this year,” said Lee Hardman, chief currency strategist at MUFG. said:
The swaps market now expects just a quarter-point cut this year, with some analysts even predicting that the easing cycle is over.
U.S. stocks, which sold off on Friday after the data was released, were poised to fall again at the opening on Wall Street, with S&P 500 index futures down 0.9% and technology-heavy Nasdaq 100 index futures down 1.3%.
The pound fell another 0.8% to $1.211, its lowest in 14 months. It was the worst performance among G10 currencies and continues a bruising trading period for UK assets following last week’s gold sell-off.
British government bonds were weak in early trading, with the 10-year yield rising 0.05 percentage points to 4.89%, close to last week’s 16-year high. Gilts suffered from a mix of global bond sales and concerns about the UK economy.
“A concrete reversal would require a commitment to cut spending or an easing of services inflation on Wednesday,” said William Vaughan, fixed income portfolio manager at Brandywine Global.
Asia-Pacific stock markets also fell on Monday. “People were surprised by the strength of the U.S. economy,” said Jason Lui, head of Asia-Pacific equity and derivatives strategy at BNP Paribas. “If U.S. interest rates are too high, liquidity will flow out of Asia and capital will either flow to the U.S. or stay there.”
Australia’s S&P/ASX 200 index fell 1.2%, and South Korea’s KOSPI fell 1%. India’s Sensex index fell 1.3%. Japanese markets were closed on Monday.
“Emerging market stocks have traditionally performed better when U.S. interest rates are low,” said Sunil Thirumalai, head of Asia equity strategy at UBS. “Without the Fed cutting rates and weaker currencies mean there is less room for rate cuts in Asia.”
Hong Kong’s Hang Seng index fell 1%, and mainland China’s CSI 300 index fell 0.3%.
Mainland Chinese stocks have fallen steadily in recent months as hopes for China’s bazooka stimulus package fade and concerns about the impact of President Donald Trump’s second term on the economy take over markets.
“Some of the stimulus was a positive surprise,” said Thirumalai, who acknowledged that China was still in a “bear market.” “For example, expanding our trade-in scheme to a wider range of consumer goods has come sooner than we thought.”
Oil prices rose to their highest in four months after the United States announced new sanctions on Russian oil on Friday. The price of Brent crude oil, the international benchmark, rose 2.3% to $81.65 per barrel.
