The US dollar rose to a two-week high on Wednesday, underpinned by elevated US Treasury yields, as investors questioned the market expectation of six interest rate cuts in 2024.Trading was relatively subdued, with Japanese markets shut for a holiday and investors waiting for important US economic releases later in the day, including minutes from the Federal Reserve’s December meeting.

Bitcoin, meanwhile, sank more than 5 per cent on Wednesday after climbing to more than $45,000 on Tuesday, its highest since April 2022. Still, optimism about bitcoin remained high amid a possible approval this week of a spot exchange-traded fund for the world’s largest cryptocurrency.

The greenback, on the other hand, has moved in tandem with Treasury yields, with those on the 10-year hitting 4 per cent for the first time in two years. The 10-year yield was last up 5.7 basis points (bps) at 4.0008 per cent, while the dollar index rose 0.3 per cent to 102.59, after earlier touching a two-week peak of 102.61.

“Markets are suffering a brutal hangover to kick off the year, with Treasuries unwinding some of December’s euphoric moves and the dollar steamrolling its rate-sensitive rivals,” said Karl Schamotta, chief market strategist, at Corpay in Toronto.“To some extent, this is positioning-driven mean reversion: investors drank a little too much liquidity last month, and the consequences are now arriving.”

The dollar, however, came off its highs after data showed the US manufacturing sector contracted further in December although the pace of decline has slowed.The Institute for Supply Management (ISM) said on Wednesday its manufacturing PMI increased to 47.4 last month after being unchanged at 46.7 for two straight months.

It was the 14th consecutive month that the PMI has stayed below 50, which indicates contraction in manufacturing. That is the longest such stretch since the period from August 2000 to January 2002.At the same time, US job openings fell for the third straight month in November.

Job openings, a measure of labor demand, dropped 62,000 to 8.790 million on the last day of November, the Labor Department said in its monthly Job Openings and Labor Turnover Survey, or JOLTS report, on Wednesday.In other currencies, the euro was last down 0.3 per cent against the dollar at $1.0906.

It earlier fell to $1.09050, its lowest since mid-December, and dropped 0.95 per cent on Tuesday in its biggest daily decline since July.A drop in inflation and a dovish tilt in the Federal Reserve’s December policy meeting fueled bets for US rate cuts in 2024, undermining the greenback and sparking a rally in Treasuries and stocks in November and December.

The dollar index hit a five-month low of 100.61 last week.Those trends failed to carry over into the New Year, with the S&P 500 and Nasdaq Composite closing lower on their first trading session of 2024, dragged down by big tech names. Treasury yields jumped as prices fell, boosting the attractiveness of US debt and propelling the dollar higher on Tuesday.

The greenback was last up 1.2 per cent per cent against Japan’s yen at 143.69, adding to the previous day’s 0.82 per cent gain.Investors will scrutinise the minutes from the Fed’s December meeting, due at 1900 GMT (2 p.m. ET), for any hints about how many rate cuts the central bank will actually carry out this year.“Contradictions underpinning the rally are also being laid bare.

With at least six rate cuts priced in against a still-resilient economic backdrop, it is increasingly difficult to see the consensus bearish-dollar trade playing out this year,” said Corpay’s Schamotta.“If the US economy continues to outperform against expectations, yields should push higher, equity valuations could fall, and the greenback should climb.

”Sterling was last flat at $1.2620. It slid 0.87 per cent in the previous session, its sharpest daily fall in nearly three months.Analysts said the risk-off mood was also in part driven by concerns over escalating geopolitical tensions, after Hamas deputy leader Saleh al-Arouri was killed in a drone strike in Lebanon’s capital Beirut on Tuesday.

Lebanese and Palestinian security sources blamed his death on Israel, which has neither confirmed nor denied responsibility.

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