Dollar rises as traders focus on interest rate bets and tension in the Red Sea

The dollar gained ground on Tuesday as investors tempered their expectations of imminent interest rate cuts by the Federal Reserve, influenced by hawkish comments from European Central Bank officials. Meanwhile, concerns over potential attacks on ships in the Red Sea contributed to a reduced appetite for risk.

Here’s a breakdown of key movements:

• Dollar Index: The dollar index, which measures the greenback against a basket of currencies, rose 0.253 percent to 102.90 points.
• Euro: The euro declined 0.3 percent to $1.09185.
• Pound Sterling: The pound sterling fell to $1.2681, down 0.36 percent during the day, moving away from its recent high of $1.2825 in late December.
• ECB Comments: Comments from European Central Bank officials expressing reluctance for early interest rate cuts created uncertainty about the global interest rate outlook.
• Yemeni Houthi Movement: A statement from the Yemeni Houthi movement on plans to expand targets in the Red Sea, including American ships, added to geopolitical tensions.
• Federal Reserve Expectations: The CME Fed Watch tool indicated a 70 percent chance of a 25 basis points interest rate cut by the US Federal Reserve in March, reflecting changing expectations. However, traders still expect more than a 160 basis points cut this year.
• Japanese Yen: The yen fell 0.20 percent to 146.07 per dollar, influenced by data showing a flat producer price index in December.
• Australian and New Zealand Dollars: The Australian dollar declined 0.53 percent to $0.6625, while the New Zealand dollar fell 0.46 percent to $0.61715.

Overall, changing expectations regarding interest rate cuts and geopolitical uncertainties contributed to shifts in currency markets. Traders are closely monitoring central bank communications and geopolitical developments for potential impact on market dynamics.