Dollar Holds Near One-Year High, But Gains Slow as Treasury Yields Ease

The U.S. dollar remained close to its recent peak on Thursday, though its rally showed signs of slowing as investor momentum in the so-called “Trump trade” waned. Treasury yields dipped slightly alongside a Wall Street downturn led by industrial stocks, while recent data indicated a 0.2% rise in October producer prices due to service costs and an unexpected drop in jobless claims, underscoring continued labor market resilience. Richmond Fed President Tom Barkin highlighted potential inflation risks linked to high union wage settlements and tariffs, suggesting these factors could lead to a more cautious Fed stance.

Fed Signals Caution as Investors Weigh Inflation and Labor Costs

As the dollar’s strength shows signs of moderating, market participants remain focused on insights from Federal Reserve Chair Jerome Powell and New York Fed President John Williams, both expected to address economic outlooks. Barkin’s comments underscore growing Fed concerns about inflationary pressures tied to labor and tariffs, which could affect future rate decisions. Meanwhile, the Treasury yield curve flattened as the 2s-10s spread narrowed by five basis points to +11.6bp, signaling investor caution.

Euro and Pound Edge Higher Amid Mixed Central Bank Messages

The euro gained modestly following eurozone employment data, lifting EUR/USD slightly from recent lows. ECB minutes revealed internal debate over low inflation risks, with some policymakers advocating for caution as eurozone inflation remains subdued. The pound saw mixed performance after BoE policymaker Catherine Mann suggested a pause on rate hikes until U.S.-related inflation pressures recede, adding uncertainty to the Bank of England’s approach. Traders awaited further guidance from U.K. finance minister Rachel Reeves and BoE Governor Andrew Bailey, both expected to address inflation and rate policy.

Commodity-Linked Currencies and Safe Havens Show Limited Movement

The Australian dollar softened under pressure from weaker commodity prices, while the yen gained as a safe haven amid softer U.S. equity markets. Meanwhile, gold slipped by 0.13% as the dollar retained strength, and copper showed minimal movement, reflecting cautious commodity sentiment.

Market Outlook: Dollar’s Path May Be Tempered by Cautious Fed Signals

The dollar’s upward momentum may moderate if inflation concerns persist, and cautious Fed messaging dampens expectations of aggressive rate adjustments. The euro could find support if eurozone employment gains persist, though inflation challenges remain a headwind. The pound may experience added volatility, especially with impending U.K. policy statements from key officials. The yen could gain further if U.S. equities continue to weaken, supporting its safe-haven appeal, while commodity-linked currencies like the Aussie may remain under pressure from dollar strength and commodity price fluctuations. Overall, currency markets are expected to closely follow central bank rhetoric and economic data for signs of price stability amidst inflationary concerns.