NEW YORK: The dollar strengthened on Thursday after unemployment claims pointed to a strong US jobs market that along with other data showing growing labor costs indicates the Federal Reserve will keep interest rates higher for longer.

The yield on two-year Treasury notes, which are sensitive to interest rate expectations, shot to levels last seen in July 2007 at 4.944% as the market perceived the Fed will raise rates further to tame sticky inflation.

“There’s more and more of a concern that incoming data is revealing that the Fed might be a little bit behind the curve than maybe they expected heading into this year,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto.

Sterling was held back by remarks from Bank of England Governor Andrew Bailey, who said “nothing is decided” on future rate increases, which had traders trimming back bets on higher rates. Sterling traded at $1.1954, down 0.64% on the day.

The Japanese yen weakened 0.35%, while the Australian and New Zealand dollars moved lower after strong gains on Wednesday driven by Chinese manufacturing data. The offshore Chinese yuan rose 0.59% to $6.9192 per dollar.

Investors are looking ahead to China’s National People’s Congress meeting, which begins on Sunday, for guidance on policy support for the post-COVID recovery.