With US rates and tariffs in the spotlight, the dollar holds onto its two-year high.

According to Reuters, Singapore As traders rein in U.S. rate cuts in 2025 following robust economic data, the dollar hovered close to its best level in over two years on Tuesday. Meanwhile, market concerns over Britain’s fiscal health kept the weak pound in the forefront.

The attention has been on President-elect Donald Trump’s ideas, which economists predict will increase growth but increase pricing pressures, as he returns to the White House next week.

The Federal Reserve’s stated gradual approach to rate decreases this year and the fear of tariffs have raised Treasury rates and the dollar, placing pressure on the euro, pound, yen, and yuan.

Senior Asia-Pacific rates strategist Prashant Newnaha of TD Securities stated that the market’s attention now seems to be turning to the potential for a steady increase in U.S. tariffs.

“The USD’s overnight decline to these headlines suggests that tariffs fears have been baked in,” Newnaha said, citing a Bloomberg piece that said the Trump administration could implement duties gradually.

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

The euro hovered close to the more than two-year low of $1.0177 it struck on Monday, but it remained stable at $1.02475 in early trade. Inching away from the nearly six-month low it reached last week, the yen was trading at 157.54 per dollar.

The dollar index, which compares the value of the US dollar to six other currencies, was up 0.16% at 109.59 on Monday, not far from the 26-month high of 110.17 it reached.

Investor attention will be on the inflation data on Wednesday after a strong employment report on Friday reaffirmed support for the U.S. central bank’s cautious approach to more monetary policy easing this year.

The Fed shocked the market in December with its moderate approach to rate cuts because of inflation concerns, and traders now pricing in 29 basis points of easing this year, less than the 50 basis points it had predicted.

In erratic trading on Monday, U.S. Treasury 10-year rates reached a 14-month high of 4.799% before declining. In early Asian hours, it stood at 4.7717%.

A stronger dollar and higher Treasury rates are pushing out financial flows to the rest of the world, according to ING analysts, and this is beginning to pose issues.

The most crucial FX market battlefield at the moment is the dollar/yuan, where the PBOC is currently holding the line despite mounting depreciation pressure. “Using the tariff era of 2018-2019 as a template, we expect the dollar to stay strong all year,” they said in a note.

The People’s Bank of China (PBOC) has announced a slew of actions to help its faltering currency, including plans to increase the number of dollars it has in Hong Kong to strengthen the yuan and to enhance capital flows by enabling businesses to borrow more money abroad.

In early trade, the offshore yuan was last trading at 7.3465 to the dollar.

With rising bond rates hitting British markets, the pound has been in the crosshairs of international currency speculators. Although higher rates tend to help the currency, economists predict that in Britain, increased borrowing costs would require the government to raise taxes or cut expenditure in order to comply with budgetary regulations, which might have an adverse effect on future growth.

The pound touched $1.21 on Monday, its lowest since November 2023, and last traded at $1.2211 in early trading.

The Australian dollar fell to its lowest level since April 2020 on Monday, but it was up 0.13% for the day at $0.6184. The New Zealand dollar increased by 0.3% to $0.55995, staying close to the two-year low it reached the day before.