Dollar climbs as US bond yields continue ascent on tariff concerns

The US Dollar (USD) rose for a second straight session on Wednesday as U.S. bond yields continued their recent advance, following a report that President-elect Donald Trump was contemplating the use of emergency measures to allow for a new tariff program.

The yield on the benchmark 10-year U.S. Treasury note hit 4.73%, its highest level since April 25, after CNN reported Trump is considering declaring a national economic emergency in order to provide legal footing for a series of universal tariffs on allies and adversaries.

On Monday, the Washington Post said Trump was looking at more nuanced tariffs, which he later denied.

“This feeds into this whole theme of a strong dollar and even with the disappointing ADP (employment data), the dollar is still firmer on the day,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“What it means is people ought not to resist this, it is a genuine move that hasn’t exhausted yet.”

Earlier data on the U.S. labor market was conflicting, as the ADP National Employment Report showed U.S. private payrolls growth slowed sharply in December to 122,000, from 146,000 in the prior month. Economists polled by Reuters had forecast a gain of 140,000.

However, weekly initial jobless claims fell to an 11-month low of 201,000 and below the estimate of 218,000 in a Reuters poll of economists.

The dollar index, which measures the greenback against a basket of currencies, rose 0.41% to 109.15, with the euro down 0.36% at $1.0302.

The data was release ahead of Friday’s key monthly employment report from the U.S. government.

Markets are now pricing in just 39 basis points of easing from the Federal Reserve this year, with a first interest rate cut likely to happen in June.

Fed Governor Christopher Waller said on Wednesday that inflation should continue to fall in 2025 and allow the U.S. central bank to further reduce interest rates, though at an uncertain pace.

Investors later on Wednesday will eye the minutes from the Fed’s Dec. 17-18 meeting, which may show how many policymakers are supportive of keeping rate cuts on hold given the slowed progress on inflation and a resilient economy.

Goldman Sachs analysts said in a note that the Fed’s reaction function, “how they balance the potential inflation impacts versus any negative growth impacts – will impact the dollar,” but for now they see the negative growth impacts of tariffs in the rest of the world outweighing those in the U.S., which will be reflected in monetary policy.