FOREX-Dollar stays strong as doubts about Fed rate cuts grow

Updates to U.S. afternoon

By Laura Matthews

NEW YORK, Jan 13 (Reuters) - The dollar rose on Monday, driving its peers to multi-year lows, after Friday's blowout U.S. jobs report underscored economic strength and fueled growing doubts about the Federal Reserve cutting interest rates this year.

The dollar index, which measures the greenback against a basket of currencies, rose 0.26% to 109.94. Earlier in the session it surged to its highest in more than two years, peaking at 110.17 =USD and extending the recent rally.

U.S. jobs growth unexpectedly accelerated in December and the unemployment rate fell to 4.1%, leaving traders heavily scaling back bets of rate cuts this year.

Markets are pricing in a 25 basis point cut from the Fed for December, after not fully pricing one in for 2025.

With Wednesday's U.S. inflation report up next, any upside surprise could further close the door on future easing. A slew of Fed officials are also due to speak this week.

"With markets currently pricing in just over one rate cut by year-end, the reaction to the inflation print may be relatively measured," said Uto Shinohara, senior investment strategist at Mesirow Currency Management in Chicago.

"A more critical inflection point is the Trump inauguration this month, after which we'll see if Trump's tariff threats are fully realized or were they a negotiating ploy."

President-elect Donald Trump returns to the White House on Monday. His plans for hefty import tariffs, tax cuts and immigration restrictions could stoke inflation, adding to expectations of a less aggressive easing cycle.

The euro EUR=EBS, down 0.4% at $1.0208, earlier in the session hit its weakest level against the dollar since November 2022. Sterling GBP=D3 was last down 0.24% at $1.2167, after sliding to a 14-month low earlier in the day.

The pound has been under pressure from concerns over rising borrowing costs and growing unease over Britain's finances. It tumbled 1.8% last week.

Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said the general bullishness toward the dollar stems from diverging central bank policies and the threat of tariffs.

"The tariff threat seems to be inflationary in the U.S.," he said, citing the impact it can have on interest rates. "But (it) also seems that tariffs would further destabilize some of our key trading partners, including Europe, Canada, Mexico."

After sinking to its weakest since April 2020, the Australian dollar AUD=D3 was up 0.13% at 0.615. The New Zealand dollar NZD=D3 edged up 0.07% to $0.5559, staying near a more than two-year low.

BEIJING STEPS IN

The yuan bucked the global trend and rose slightly on Monday after Beijing stepped up efforts to defend the weakening currency by relaxing rules to allow more offshore borrowing and sending verbal warnings.

The dollar slipped 0.12% against the offshore yuan CNH=D3, which was trading at 7.3533 per dollar.

On Friday, the People's Bank of China suspended treasury bond purchases, which briefly lifted yields and spurred speculation it is stepping up defence of the yuan.

The Chinese currency has come under renewed pressure in part due to investors' disappointment over the lack of further stimulus from Beijing to shore up its struggling economy.

The dollar is down 0.03% against the yen JPY=EBS at 157.7. The yen's decline was mitigated by news that Bank of Japan policymakers could raise their inflation forecast at a policy meeting this month as a prelude to hiking rates again.

(Reporting by Laura Matthews in New York; Additional reporting by Samuel Indyk and Rae Wee; Editing by Emelia Sithole-Matarise, Bernadette Baum and Richard Chang)