The US dollar surged to a two-year high, putting pressure on the British pound and the euro

According to Zhitong Finance APP, the dollar soared to a two-year high against the euro and an eight-month high against the pound on Thursday, boosted by strong U.S. labor market data that bolstered investor confidence in the world's largest economy. The pound, one of the best-performing G10 currencies last year, fell 1.2% to $1.2371, the lowest level since the end of April; the euro dropped 0.9% to $1.0261, the lowest point since November 2022. The dollar index, which tracks the dollar against a basket of six currencies including the pound and euro, rose 0.7%.

Thursday's currency market performance reflects growing investor belief that the resilience of the U.S. economy and persistent inflation will limit the Federal Reserve's pace of interest rate cuts this year, thereby enhancing the dollar's attractiveness compared to other major currencies. Data showed that initial jobless claims in the U.S. fell to an eight-month low last week, further confirming the robustness of the labor market.

Markets expect the Federal Reserve to cut rates by about 0.43 percentage points by the end of 2025. Meanwhile, due to weak economic growth expectations in the UK and Eurozone, the Bank of England and the European Central Bank are expected to cut rates by 0.59 percentage points and 1.08 percentage points, respectively, during the same period.

In the stock market, early gains in U.S. stocks were erased, with all three major indices closing lower. The pound was hit hard on Thursday as investors cut their long positions. Kit Juckes, a foreign exchange strategist at Société Générale, stated, "One big surprise at the end of last year was that traders usually hedge dollar positions, but almost no one did. The pound is a currency held by many investors, so when the dollar continues to strengthen, the pound appears particularly weak in thin trading."

Additionally, analysts pointed out that the weak manufacturing data from the UK and Eurozone released on Thursday morning, along with the threat of rising natural gas prices, also put pressure on the pound and euro. Early Wednesday morning, gas supplies from Russia to EU countries via Ukraine were halted due to the expiration of a five-year agreement. This forced European countries to import more expensive liquefied natural gas from elsewhere. According to data from the industry body European Gas Infrastructure, the EU is consuming its gas reserves at the fastest rate since the energy crisis three years ago due to increased demand from cold winter weather.

Lee Hardman, a currency strategist at MUFG Bank, stated, "Higher natural gas prices will negatively impact the trade conditions of the UK and other Eurozone economies, as these countries are major energy importers." David Oxley, Chief Climate and Commodities Economist at Capital Economics, added that higher EU gas prices will continue to pressure the industrial sector in the region However, it will not "significantly change the outlook for inflation and interest rates."

Although the strength of the dollar may continue, the future performance of the pound and euro will still be influenced by economic fundamentals and the trends in energy prices