Dollar Heads for Best Week in Over a Month on Rate Outlook and US Economic Performance

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The dollar was poised for its best weekly performance in over a month on Friday, supported by expectations that the Federal Reserve will implement fewer rate cuts this year and the view that the U.S. economy will continue to outperform its global counterparts.

Starting the year strong, the greenback reached a more than two-year high of 109.54 against a basket of currencies on Thursday, extending its rally from 2024. Its rise has been driven by a more hawkish Fed and a resilient U.S. economy.

"Given the U.S. exceptionalism story and high U.S. yields, dollar strength seems likely to persist early in 2025," said Charu Chanana, chief investment strategist at Saxo. "The uncertainty around the incoming Trump administration's policies also adds to the dollar’s appeal as a safe haven."

Ahead of President-elect Donald Trump's inauguration on January 20, markets remain cautious about his policies, including potential import tariffs, tax cuts, and immigration restrictions, which have further bolstered the dollar’s safe-haven status.

The dollar index stood at 109.18, on track for a weekly gain of 1.1%, marking its strongest performance since November. Meanwhile, the euro was one of the biggest losers, dropping 0.86% in the previous session to a more than two-year low of $1.022475. Kyle Rodda, senior financial market analyst at Capital.com, noted that the eurozone could face direct impacts from higher trade tariffs and the broader effects of tariffs on China, which may weaken the eurozone further.

The euro last traded at $1.0272 and was on track for a 1.6% weekly decline, its largest drop since November. Similarly, the British pound rose slightly by 0.04% to $1.2385 after a 1.16% slide on Thursday, but it was still set to lose about 1.6% for the week.

The dollar's dominance was further aided by the widening interest rate differentials between the U.S. and other countries. While traders anticipate only 44 basis points of rate cuts from the Fed this year, they expect more than 100 basis points from the European Central Bank and about 60 basis points from the Bank of England.

The yen rose by 0.16% to 157.25 per dollar, though it remained close to its over five-month low of 158.09 per dollar from December. The yen has struggled due to the significant interest rate gap between the U.S. and Japan, with the Bank of Japan remaining cautious about further rate hikes.

In 2024, the yen fell by more than 10%, marking its fourth consecutive year of losses. The Australian dollar rose by 0.2% to $0.6216 but stayed near a more than two-year low, on track for a 0.2% weekly decline. The New Zealand dollar edged up by 0.17% to $0.56065, though it was headed for a 0.66% loss for the week.

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.