??Dollar Strengthens: Resilient U.S. Economy, Cautious Central Banks Impact Markets!

The dollar headed for a second weekly gain in a row on Friday on signs of resilience in the U.S. economy and caution about rate cuts from central bankers.

Weekly gains on the risk-sensitive Australian and New Zealand dollars of 1.7% and 2.1% are set to be the largest since November and June respectively. Markets price a 57% chance of a U.S. rate cut in March, down from 75% a week ago. (FEDWATCH)

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The dollar index?DXY?is up 0.9% to 103.4 on the week and at 148.12 yen?USDJPY?the dollar is up almost 5% on the Japanese currency this year as confidence that the Bank of Japan (BOJ) is about to hike rates has also been rattled. Data on Friday showed Japan's core inflation slowed to 2.3% in the year to December, its lowest annual pace since June 2022 - seemingly vindicating policymakers' wait-and-see approach.

"The market's realisation that rates hikes will not be easy for the BOJ in the coming months and the coincident repricing of Fed rate cut risks have already been reflected in the move higher in dollar/yen," said Rabobank strategist Jane Foley. Rabobank revised its one-month forecast for dollar/yen to 148 from 144, expecting further unwinding of bets on the pace of U.S. rate cuts to support the dollar.

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Currency moves early in the Asia session were modest on Friday, leaving the euro?EURUSD?down 0.7% for the week at $1.0878 and sterling?GBPUSD?down 0.3% to $1.2708. The Aussie?AUDUSD?caught a little support from stabilising iron ore prices and rose 0.1% to $0.6578. The kiwi?NZDUSD?was steady at $0.6118.

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Overnight U.S. labour-market data was strong, with weekly jobless claims dropping to their lowest level in nearly 1-1/2 years, adding to the pressure on market rate-cut wagers. Two-year Treasury yields (US2YT=RR), which track short-term interest rate expectations, are up 22 basis points this week to 4.3587%.

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