Dollar surges against the euro and sterling

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The dollar surged to a two-year high against the euro and an eight-month high against sterling on Thursday after robust US jobs market data added to investor confidence about the strength of the world’s largest economy.

The pound, which was the best-performing G10 currency against the dollar last year, dropped as much as 1.3 per cent to $1.2354, its lowest level since late April, while the euro fell 0.9 per cent to $1.0267, its lowest level since November 2022.

On Friday morning in Asia, the pound stood slightly higher at $1.2390 while the euro was trading at $1.0271. An index tracking the dollar against a basket of six peers, including sterling and the euro, was on track for a weekly gain of 1.1 per cent, its best performance in more than a month.

Thursday’s moves reflected investors’ growing belief that resilient US economic growth and lingering inflation would limit how quickly the Federal Reserve cuts interest rates this year, bolstering demand for the dollar relative to other big currencies. 

Data on Thursday showed that new applications for unemployment benefits hit an eight-month low last week.

Markets expect the US central bank to lower rates by 0.43 percentage points by the end of 2025. Sluggish growth forecasts for the UK and the Eurozone mean the Bank of England and European Central Bank are expected to cut rates by 0.59 percentage points and 1.08 percentage points, respectively, over the same period. 

In equity markets, US stocks gave up early gains to close lower, with the S&P 500 and the technology-heavy Nasdaq Composite both down 0.2 per cent.

Sterling was “getting bashed” on Thursday as investors trimmed their long positions on the currency, said Kit Juckes, a currency strategist at Société Générale. 

“A big surprise at the end of last year was that there was very little selling of the dollar, when traders usually hedge their positions,” Juckes said.

“Sterling is a currency that a lot of people own, which leaves it a bit vulnerable when the dollar keeps on rallying, particularly in thin trading [conditions],” he added. 

Other analysts said weak UK and Eurozone manufacturing data released on Thursday morning and the threat of higher natural gas prices might also be weighing on both sterling and the euro. 

In the early hours of Wednesday, Russian gas stopped flowing through Ukraine to EU states after a five-year deal expired, meaning European countries will be forced to import more expensive LNG from elsewhere.

The EU was emptying its gas storage facilities at the fastest pace since the energy crisis three years ago as colder winter weather boosts demand, according to data from Gas Infrastructure Europe, an industry body.

“Higher gas prices would be negative for the terms of trade for the UK and other euro economies, given they’re big importers of energy,” said Lee Hardman, currency strategist at MUFG Bank.

David Oxley, chief climate and commodities economist at Capital Economics, said higher EU natural gas prices would maintain pressure on the region’s industrial sector but would not “move the needle on the outlook for inflation and interest rates”.

Additional reporting by Harriet Clarfelt in New York