Dollar hits 2-year high after robust US data puts brake on rate cut bets

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The dollar hit a two-year high against major currencies on Monday after strong US jobs data late last week led traders to slash expectations for further interest rate cuts by the Federal Reserve.

The dollar index, which tracks the US currency against the yen, euro and other major currencies, reached its highest level since November 2022, with the pound falling 0.5 per cent to $1.216 — a new 14-month low.

Equities in China, India, South Korea and Australia also declined on Monday after the US payrolls report on Friday showed 256,000 jobs were added in December, blowing past consensus estimates and raising concern that a strong economy could slow the Fed’s pace of rate cuts.

“People are surprised by the economic strength in the US,” said Jason Lui, head of Asia-Pacific equity and derivative strategy at BNP Paribas. “With US interest rates so high you will have a liquidity drain in Asia, with capital flowing to the US or staying there.”

Australia’s S&P/ASX 200 index fell 1.2 per cent, while South Korea’s Kospi declined 1.1 per cent. India’s Sensex fell 0.8 per cent. Japanese markets were closed on Monday.

“Emerging market equities traditionally perform better when US interest rates are lower,” said Sunil Tirumalai, head of Asian equity strategy at UBS. “The Fed not cutting and weak currencies means less room for Asian rate cuts.”

Hong Kong’s Hang Seng index declined 1.2 per cent, while mainland China’s CSI 300 was down 0.5 per cent.

“The onshore [Chinese] market is still more resilient relative to external noise,” said Lui, who said mainland investors were still shifting funds from low-yield savings accounts into the equity market.

Nonetheless, mainland Chinese equities have steadily declined by 17 per cent since a peak on October 8 last year, as hopes for a bazooka-style stimulus from Beijing faded and concerns over the economic impact of Donald Trump’s second term hit the market.

“Some stimulus measures have been a positive surprise,” said Tirumalai, who acknowledged China was still in a “bear market”. “The extension of the trade-in scheme to a wider array of consumer goods for example came earlier than we thought.”

Oil prices rose to a four-month high after the US announced sweeping new sanctions on Russian oil on Friday.

Prices for Brent crude, the international benchmark, climbed 1.6 per cent to $81 a barrel, while US gauge West Texas Intermediate gained 1.7 per cent to $77.90 a barrel.