The dollar index rose for the second consecutive day on Wednesday, supported by rising global bond yields, robust U.S. economic data, and renewed concerns over potential tariffs under President-elect Donald Trump. A CNN report suggesting the administration might implement emergency tariff measures bolstered the greenback. Mixed U.S. labor market data, including ADP figures and weekly jobless claims, hinted at gradual cooling in employment but were offset by the Federal Reserve’s December meeting minutes, which emphasized a cautious approach to easing rates due to persistent inflation pressures. Federal Reserve Governor Christopher Waller expressed optimism that inflation would ease in 2025, paving the way for additional rate cuts. Market attention now turns to Friday’s U.S. jobs report for further labor market insights.

Sterling Tumbles Amid Rising Yields and Bearish Sentiment

Sterling fell for the second straight session as U.K. 30-year government bond yields hit a 26-year high, fueling concerns about the rising cost of borrowing. Option markets reflected heightened bearish sentiment, with risk reversals widening in anticipation of further losses. GBP/USD dropped sharply, highlighting investor unease over Britain’s economic trajectory and the potential for further downside.

Euro Under Pressure from Weak Data and Tariff Threats

EUR/USD fell 0.29%, weighed down by weak eurozone sentiment data, soft German industrial orders, and renewed U.S. tariff concerns. ECB policymaker Francois Villeroy indicated that eurozone rates could cease to constrain growth by summer 2025 if inflation is under control. However, concerns over diverging economic conditions and bearish technical signals reinforced the euro’s vulnerability.

Yen Weakens Against Dollar but Gains on Haven Flows

The yen declined against the dollar for a third straight day, pressured by rising U.S. Treasury yields. However, the yen gained against other G10 currencies, supported by haven flows amid global uncertainties. BOJ regional reports and overtime data scheduled for Thursday are expected to shed light on Japan’s economic direction.

Commodity Currencies Struggle Amid Strong Dollar and Risk-Off Sentiment

Commodity-linked currencies, including the Australian dollar, faced pressure from a stronger dollar and subdued risk sentiment. The Canadian dollar also weakened, impacted by potential U.S. tariffs and increased hedging activity against further declines.

Treasury Yields and Equities Reflect Mixed Sentiment

Treasury yields presented a mixed picture, with the 2s-10s curve steepening slightly by over a basis point to +40.8bp. Equities showed little change, with the S&P 500 trading flat as optimism in industrial metals offset broader market concerns.

Commodities: Oil Falls, Copper Surges

• Oil: Fell over 1%, pressured by a stronger dollar and a build in U.S. fuel inventories.
• Gold: Edged up 0.1%, reflecting modest safe-haven demand amid geopolitical uncertainties.
• Copper: Surged 1.8% as funds capitalized on its industrial applications and potential supply constraints.

Currency Market Summary: Dollar Dominates While Majors Struggle

• EUR/USD: Closed near its lows, down 0.29%, weighed by U.S. tariff concerns and weak eurozone data.
• USD/JPY: Continued to rise alongside U.S. Treasury yields, highlighting yen weakness against the dollar.
• GBP/USD: Posted significant losses as soaring U.K. bond yields added to bearish sentiment.
• AUD/USD: Edged lower amid subdued risk sentiment and a stronger dollar.
• Cross-Currency Pairs: EUR/JPY and GBP/JPY declined, reflecting global risk aversion and yen resilience against non-dollar majors.

Market Outlook: Data and Trade Policies to Shape Sentiment

• Dollar: Likely to remain strong, bolstered by rising yields and robust U.S. data, though geopolitical and trade developments could introduce volatility.
• Euro: Faces continued pressure unless eurozone data improves or ECB policymakers signal greater confidence in the region’s growth outlook.
• Yen: Could remain under pressure from U.S. yield differentials, though haven demand may offer intermittent support.
• Sterling: Vulnerable to further losses unless U.K. economic data or bond market stability reverses current bearish sentiment.
• Commodity Currencies: Australian and Canadian dollars may face additional downside risks from weak sentiment and dollar strength, though commodity price movements could provide pockets of support.

Conclusion: Markets Brace for Tariff Developments and Key Data

The dollar’s strength reflects robust U.S. economic data, rising yields, and geopolitical uncertainties surrounding trade policy. The euro and sterling face challenges from weak regional data and tariff risks, while the yen navigates a delicate balance between yield differentials and haven demand. Commodity markets remain mixed, with oil under pressure and copper rallying on industrial optimism. As markets await Friday’s U.S. jobs report and further clarity on trade policies, volatility is expected to remain elevated.