US Dollar Hits 2-Year High Amid Inflation Fears

The US dollar index reached a two-year high on Monday following a strong payroll report and anticipation of inflation-driving policies under President-elect Donald Trump. French Prime Minister Francois Bayrou is set to outline compromises on pension reforms today to secure support for the 2025 budget, with markets uneasy about potential fiscal impacts. Meanwhile, US Treasury yields surged to 14-month highs, sparking a sell-off in tech stocks that extended to Asian markets.

Equities

The FTSE 100 opened lower, dropping 0.8% as investors reacted to global inflation concerns and political developments in France. The index faced pressure from falling energy and banking stocks, with BP declining 1.5% following softer-than-expected guidance on production output for the first quarter.

AstraZeneca's share price rose 0.6% after the company confirmed the successful Phase III trial of a new cancer drug, boosting confidence in its pharmaceutical pipeline.

In the US, the S&P 500 closed down 1.2%, reflecting heightened caution among investors after strong payroll data raised expectations for prolonged Federal Reserve tightening.

Technology stocks saw notable losses, with Tesla sliding 3.4% amid news of production delays at its Texas facility. Apple dropped 2.1% following reports of weaker-than-expected demand for its latest iPhone model, raising questions about growth in key markets.

The Nasdaq fell 1.5%, driven by sharp declines in semiconductor stocks. Nvidia dropped 4.3% after analysts downgraded the stock, citing potential risks to its dominance in AI-related chip production.

The Dow Jones Industrial Average also edged down 0.6%, weighed by declines in industrial and consumer goods sectors. Boeing lost 1.8% after delaying deliveries of its 737 MAX planes due to supply chain disruptions, while Procter & Gamble slipped 0.7% on cautious consumer spending outlooks in North America.

On the bond market, US Treasury yields rose to their highest levels in over a year, with the 10-year yield climbing to 4.25%, reflecting stronger inflation expectations. This added further pressure on equities, particularly in rate-sensitive sectors like real estate and utilities.

Forex & Commodities

The US dollar hovered near its highest level in over two years, supported by stronger-than-expected economic data and fading expectations for Federal Reserve rate cuts in 2025. The dollar index stood at 109.59, close to Monday’s 26-month high of 110.17, as Treasury yields rose, with the 10-year yield reaching 4.799% before settling at 4.7656%. The euro remained under pressure at $1.0254, while sterling traded at $1.2211 after briefly falling to $1.21, reflecting concerns over Britain’s fiscal outlook. The yuan saw marginal gains following measures by the People’s Bank of China to support the currency, with the offshore yuan at 7.3472 per dollar.

Gold prices climbed 0.3% to $2,669.14 per ounce, rebounding from a 1% fall on Monday when robust US jobs data strengthened the dollar. Investors positioned ahead of the US producer price index (PPI) release and the upcoming consumer price index (CPI) data, which will provide further clarity on the Federal Reserve's inflation outlook. Analysts noted that inflationary concerns have bolstered gold’s role as a hedge, even as higher interest rates weigh on the non-yielding asset.

Oil prices edged lower but remained near four-month highs. Brent crude fell 0.7% to $80.48 per barrel, while WTI dipped 0.6% to $78.38, following a 2% jump on Monday. New US sanctions on Russian oil tightened supply dynamics, with analysts estimating a potential 700,000 barrels per day reduction in output. However, demand uncertainty from China and potential workarounds by Russia may limit the overall impact on supply.