By Ankur Banerjee

SINGAPORE (Reuters) – The dollar remained near its highest level in over two years on Tuesday, as traders revised expectations for U.S. rate cuts in 2025 following strong economic data. Investors’ concerns over Britain’s fiscal health also kept the frail sterling in the limelight.

With President-elect Donald Trump set to return to the White House next week, attention is on his policies expected to stimulate growth yet exacerbate price pressures.

The prospect of tariffs, coupled with the Federal Reserve’s measured approach to rate cuts this year, has led to increased Treasury yields and strengthened the dollar, pressuring the euro, pound, yen, and yuan.

Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities, noted that the market’s focus now appears to be shifting towards the possibility of gradual increases in U.S. tariffs. “The decline in the USD overnight to these headlines suggests that tariffs fears have been baked in,” Newnaha said, referring to a Bloomberg report indicating a gradual approach could be taken.

He added, “Should these headlines persist into Trump’s inauguration, it’s likely to see UST yields and the USD head lower with U.S. equities turning higher.”

The euro was stable at $1.02475 early in the trading session but remained close to the two-year low of $1.0177 from Monday. The yen traded at 157.54 per dollar, slightly distancing itself from a near six-month low.

The dollar index, measuring the U.S. currency against six others, rose 0.16% to 109.59, nearing the 26-month high of 110.17 reached on Monday.

Following a robust jobs report on Friday, which buttressed the U.S. central bank’s cautious stance on further monetary easing this year, investors look ahead to Wednesday’s inflation report. Traders are factoring in 29 basis points of easing this year, compared to the 50 basis points projected by the Fed in December.

U.S. Treasury 10-year yields peaked at 4.799%—a 14-month high—during volatile trading before falling back to 4.7717% in early Asian hours.

ING strategists remarked that the strong dollar and higher Treasury yields are generating issues globally by crowding out financial flows. Using the tariff period of 2018-2019 as a guide, they predict the dollar will remain strong throughout the year, with the dollar/yuan exchange rate becoming a critical battleground where the People’s Bank of China (PBOC) is managing depreciation pressures.

The PBOC has introduced several measures to support the yuan, including parking more dollars in Hong Kong to enhance capital inflows.

The offshore yuan was quoted at 7.3465 per dollar early in trading.

The pound has faced scrutiny from global currency traders, and the British markets are under pressure from rising bond yields. Although higher yields can support a currency, analysts foresee that elevated borrowing costs may compel the government to cut spending or raise taxes, likely impacting future growth.

The pound traded at $1.2211 after reaching $1.21 on Monday, its lowest since November 2023.

The Australian dollar saw a slight increase of 0.13% at $0.6184, recovering from its lowest levels since April 2020. Meanwhile, the New Zealand dollar rose by 0.3% to $0.55995, lingering near a two-year low hit in the previous session.