The U.S. dollar retreated on Monday, shedding some of its recent gains but remaining near its highest level in two years as traders awaited the release of key employment data later this week.
The dollar index, which tracks the U.S. dollar against a basket of six other currencies, was trading 0.4% lower at 108.380, losing ground after touching highs the previous week.
Dollar Starts the Week Lower
The dollar began the week on a cautious note as traders anticipated Friday’s U.S. jobs report to assess the health of the world’s largest economy.
The report is expected to show that the U.S. added 154,000 jobs in December, with the unemployment rate holding steady at 4.2%. If confirmed, this would place the average monthly job growth in 2024 at around 180,000, reflecting a slowdown compared to the past three years but still demonstrating the labor market’s resilience.
These figures are unlikely to alter the Federal Reserve’s outlook on interest rates, as policymakers currently project just two more rate cuts this year, down from the earlier forecast of four.
Uncertainty surrounding President-elect Donald Trump’s plans to implement steep import tariffs, tax cuts, and immigration restrictions after his January 20 inauguration has further provided the dollar with safe-haven support.
“The dollar could lose some momentum this week as the return of normal market conditions allows for some reconciliation with slightly lower rates. However, the proximity of Trump’s inauguration and the strong underlying narrative of a hawkish Fed may well keep any dollar correction short-lived,” analysts at ING wrote in a note.
Euro Rebounds After PMI Data
In Europe, the EUR/USD climbed 0.5% to 1.0360, supported by a modest recovery in the eurozone’s services sector during December.
The final HCOB Composite Purchasing Managers’ Index (PMI) for the bloc, compiled by S&P Global, rose to 49.6 in December from 48.3 in November.
The overall index benefited from growth in the dominant services sector, with its PMI improving to 51.6 from 49.5 in November, indicating expansion. However, this gain was offset by a deeper contraction in manufacturing activity.
The euro had dropped the previous week to its lowest level in over two years as traders anticipated further interest rate cuts by the European Central Bank through 2025.
German consumer price data for December is due later in the session, followed by Tuesday’s Eurozone inflation figures, both of which are expected to show subdued inflationary pressures in the single-currency area.
GBP/USD rose 0.4% to 1.1473, recovering from the previous week’s 1.4% decline, benefiting from the dollar’s pullback.
The Bank of England left interest rates unchanged last month after consumer prices exceeded the central bank’s target. Traders now expect approximately 60 basis points of rate cuts from the Bank of England by 2025.
Yuan Trending Lower
In Asia, USD/CNY climbed 0.4% to 7.3466, its highest level since early 2008, as China’s economic challenges and the widening yield gap with the United States weighed on the yuan.
To counter concerns of further depreciation, the People’s Bank of China reaffirmed its commitment to stabilizing the yuan, setting its daily reference rate above the critical 7.2 level against the dollar.
Caixin services activity data for December, released Monday, showed the fastest growth in seven months but failed to provide significant support for the yuan.
USD/JPY rose 0.3% to 157.75 following news of continued growth in Japan’s services sector for the second consecutive month, driven by robust demand and sustained business expansion.
Elsewhere, USD/CAD dropped 0.5% to 1.4377 amid reports that Canadian Prime Minister Justin Trudeau is expected to announce his departure from office later Monday.
