US Dollar Index surges to near 110.00 due to rising odds of Fed maintaining rates

• The US Dollar Index climbs as the latest employment report reinforces the Fed's decision to keep rates steady in January.
• Higher yields on US Treasury bonds are contributing support for the US Dollar.
• US Nonfarm Payrolls increased by 256K in December, exceeding expected 160K and November's figure of 212K.

The US Dollar Index (DXY), which tracks the US Dollar's (USD) performance against six major currencies, reached 109.98, the highest level since November 2022, during the Asian hours on Monday. The Greenback strengthened as the robust US labor market data for December will likely reinforce the US Federal Reserve's (Fed) stance to keep interest rates steady in January.

Additionally, Friday's strong US jobs data led to a surge in US yields, with the 2-year and 10-year US Treasury bond yields standing at 4.38% and 4.76%, respectively, at the time of writing. Higher yields are contributing support for the US Dollar.

Data from the US Bureau of Labor Statistics (BLS), released on Friday, reported that Nonfarm Payrolls (NFP) increased by 256K in December, significantly exceeding market expectations of 160K and surpassing the revised November figure of 212K (previously reported as 227K). Moreover, the US Unemployment Rate edged down to 4.1% in December from 4.2% in November. However, annual wage inflation, measured by the change in Average Hourly Earnings, dipped slightly to 3.9% from 4% in the prior reading.

The latest FOMC Meeting Minutes indicated that policymakers agree that the process could take longer than previously anticipated due to recent hotter-than-expected readings on inflation and the effects of potential changes in trade and immigration policy under President-elect Trump's administration.

In an interview with the Wall Street Journal, St. Louis Federal Reserve President Alberto Musalem suggested that greater caution is warranted in reducing interest rates. Musalem added that the risk that inflation might get stuck between 2.5% and 3% had increased by the time of last month's meeting, per Reuters.

Federal Reserve Board of Governors member Michelle Bowman added her voice to a chorus of Fed speakers last week as policymakers work double-duty to try and smooth over market reactions to a much tighter pace of rate cuts in 2025 than many market participants had previously anticipated.