The Dollar climbed to near its highest level in over two years on Tuesday, fuelled by robust economic data that reduced expectations for Federal Reserve rate cuts.

Following a strong jobs report reinforcing the Fed's cautious stance, investors await key US inflation data, including producer prices (PPI) and consumer prices (CPI).

Market pricing suggests 28 basis points of rate cuts this year, down from the 50 projected in December.

US Treasury 10-year yields hit a 14-month high of 4.805% on Monday before easing slightly. On Tuesday, they dropped by 3 basis points, settling at 4.776%.

“That (PPI data in line with consensus) should keep the Dollar in demand into tomorrow’s CPI, where we see some risks of a milder-than-expected print,” stated Francesco Pesole, forex strategist at ING.

With President-elect Donald Trump set to return to the White House, his growth-focused policies and potential inflationary pressures are in the spotlight.

Treasury yields have risen and the Dollar has received a boost, buoyed by tariff threats and fewer expected Fed rate cuts, Reuters reports.

However, market attention on Tuesday has shifted to the possibility of a gradual approach to implementing US tariffs following recent media reports.

“The nomination hearing of Scott Bessent for US Treasury Secretary on Thursday will be interesting, especially if he makes any comments about the Dollar and other currencies, potential tariffs, a shadow Fed, and the US fiscal outlook etc,” stated Paul Mackel, global head of forex research at HSBC.

Bessent is anticipated to manage US deficits carefully and leverage tariffs as a strategic tool in negotiations, aiming to temper the inflationary effects of the country’s economic policies.

The Dollar index, which tracks the greenback against six major currencies, climbed 0.20% to 109.58, approaching Monday's 26-month peak of 110.17. This remains below its October 2022 high of 114.78, the strongest level since 2002.

Elsewhere, the Euro rose 0.12% to $1.0257 after hitting $1.0177 on Monday, its lowest since November 2022. 

In 2024, the Euro declined over 6% due to concerns about US tariff threats and monetary policy differences between the Federal Reserve and the European Central Bank.

“We project a Euro/Dollar range of 0.95-1.05 this year and we stay bearish,” according to George Saravelos, global head of forex strategy at Deutsche Bank.

“The market is pricing a Fed-European Central Bank terminal gap of 200 bps compared to our view of 300 bps given divergent growth and fiscal outcomes,” Saravelos went on to add.