The U.S. dollar index edged higher on Tuesday after robust ISM services data and an unexpected rise in November job openings led markets to scale back expectations for Federal Reserve rate cuts. The ISM services index exceeded forecasts, with the prices paid component hitting its highest level in nearly two years, signaling persistent inflation pressures. Treasury 10-year yields climbed to a nine-month high of 4.69%, driving a steepening of the yield curve as the 2s-10s spread widened by 4 basis points to +38.7bp. Investors are now focused on December ADP employment data and weekly jobless claims for further labor market insights ahead of Friday’s pivotal December jobs report.

Euro Falls Despite Stronger Inflation as Yield Differentials Widen

The euro weakened against the dollar, dropping 0.34%, as widening German-U.S. yield spreads outweighed stronger-than-expected eurozone inflation data. The euro failed to hold above its 21-day moving average, and bearish technical signals raised risks of further losses. The Swiss franc also came under pressure, as Swiss CPI data met subdued expectations of 0.6% year-on-year, maintaining the Swiss National Bank’s dovish trajectory ahead of a likely rate cut in March.

USD/JPY Gains as Dollar Strength Meets Yen Resilience

USD/JPY rose 0.11%, driven by rising U.S. Treasury yields. However, the pair struggled to break session highs as sliding U.S. equity markets, particularly in tech and consumer discretionary sectors, capped yen-cross gains. Yen resilience was further supported by risk aversion amid weak equity performance.

Commodity Currencies Supported by Chinese Demand Optimism

Commodity-linked currencies like the Australian dollar gained modestly, with AUD/USD up 0.16%, buoyed by rising copper prices and positive sentiment around expected Chinese industrial demand. Oil prices climbed on expectations of tighter supply from Russia and Iran and increased Chinese consumption, while copper advanced 0.76% amid optimism about global industrial activity.

Geopolitical and Fiscal Uncertainties Add Market Complexity

Geopolitical and fiscal uncertainties loomed large, as U.S. President-elect Donald Trump reiterated plans for aggressive economic policies, including lifting offshore drilling bans, extending the debt ceiling, and revisiting Panama Canal control agreements. Fitch highlighted fiscal challenges for the U.S. in 2025, reflecting long-term structural concerns. Gold gained 0.46% as a hedge against geopolitical and economic risks but pared gains following strong U.S. economic data.

Currency Market Summary: Dollar Dominates Amid Yield Strength

• EUR/USD: Fell 0.34%, pressured by widening U.S.-German yield differentials and bearish technical signals.
• USD/JPY: Rose 0.11%, supported by higher U.S. yields but capped by weak equity markets.
• GBP/USD: Dropped 0.24%, weighed by dollar strength and ongoing domestic uncertainties.
• AUD/USD: Gained 0.16%, supported by rising commodity prices and positive sentiment around Chinese demand.
• Cross-Currency Pairs: EUR/JPY and GBP/JPY declined, reflecting yen resilience despite broad dollar strength.

Market Outlook: Data and Geopolitics to Shape Sentiment

• Dollar: Expected to remain supported by strong U.S. data and rising Treasury yields, with attention focused on upcoming labor market releases.
• Euro: Faces downside risks from widening yield differentials and weak sentiment unless eurozone data improves significantly.
• Yen: Could see further gains if risk aversion intensifies or global equity markets continue to struggle.
• Pound: Remains vulnerable to dollar strength and domestic uncertainties, with limited upside absent positive U.K. data.
• Commodity-Linked Currencies: The Australian dollar and peers may benefit from rising commodity prices but remain sensitive to global risk sentiment and dollar strength.

Conclusion: Dollar Strength Dominates Amid Economic and Geopolitical Uncertainty

The dollar is poised to remain strong amid robust U.S. data and rising yields, while the euro and pound face challenges from weak regional dynamics and dollar dominance. The yen and gold provide havens amid lingering geopolitical and economic uncertainties, while commodity-linked currencies like the Australian dollar track global risk sentiment and Chinese demand. Markets are expected to remain volatile as upcoming U.S. labor market data and geopolitical developments shape sentiment in the days ahead.