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The dollar surged to a two-year high against the euro and an eight-month high against the pound on Thursday as strong U.S. job market data bolstered investor confidence in the strength of the world’s largest economy.
The pound was the best-performing G10 currency last year, falling 1.3% against the U.S. dollar to $1.2354, the lowest level since the end of April; the euro fell 0.9% to $1.0267, the lowest level since November 2022.
In early Asian trading on Friday, the pound edged up to $1.2390 against the dollar, while the euro was trading at $1.0271. An index tracking the dollar against a basket of six currencies including sterling and the euro was expected to gain 1.1% on a weekly basis, its best performance in more than a month.
Thursday’s moves reflected growing confidence among investors that the resilience of U.S. economic growth and persistent inflation will limit the pace of rate cuts by the Federal Reserve this year, boosting demand for the dollar relative to other major currencies.
Data on Thursday showed new jobless claims hit an eight-month low last week.
The market expects the Federal Reserve to cut interest rates by 0.43 percentage points before the end of 2025.
In the stock market, U.S. stocks gave up early gains and closed lower, with the S&P 500 and the Nasdaq, which is dominated by technology stocks, both falling 0.2%.
Kit Juckes, currency strategist at Société Générale, said the pound “took a big hit” on Thursday as investors trimmed their long positions in the pound.
“One of the big surprises at the end of last year was that there was very little selling of U.S. dollars by traders who would normally be hedging their positions,” Jewkes said.
“The pound is a currency that a lot of people hold, which makes it a bit vulnerable if the dollar continues to rise, especially if trading is thin. [conditions],” he added.
Other analysts said weak UK and euro zone manufacturing data released on Thursday morning and the threat of higher gas prices could also weigh on sterling and the euro.
Russian gas stopped flowing to EU countries through Ukraine early Wednesday morning after the five-year deal expired, meaning European countries will be forced to import more expensive liquefied natural gas from elsewhere.
The European Union is emptying its natural gas storage facilities at the fastest pace since the energy crisis three years ago as cold winter weather boosts demand, according to industry body European Gas Infrastructure.
“Given that the UK and other euro economies are large energy importers, higher natural gas prices will have a negative impact on the terms of trade of the UK and other euro area economies,” said Lee Hardman, currency strategist at Bank of Mitsubishi UFJ.
David Oxley, chief climate and commodities economist at Capital Economics, said rising EU gas prices would continue to weigh on the region’s industrial sector but would not “have a negative impact on the inflation and interest rate outlook.” have an impact”.
Additional reporting by Harriet Clarfelt in New York
