The US dollar edged slightly lower on Monday, following last week’s jobs report, which pointed to a potential Federal Reserve rate cut later this month. However, losses were limited due to ongoing uncertainty in the Middle East.
As of 04:00 ET (09:00 GMT), the Dollar Index, which measures the greenback against six major currencies, dipped 0.1% to 105.550.
Dollar Rally Shows Signs of Fatigue
The post-election rally in the US dollar, which gained momentum after Donald Trump’s presidential victory, appears to be losing steam as the year nears its close. This comes amid expectations of another Federal Reserve rate cut next week, even after a stronger-than-expected rebound in November jobs growth.
“Much of the US dollar-positive narrative, including robust economic data and trade or fiscal risks, is already reflected in the price, with dollar positioning remaining notably long,” analysts at Morgan Stanley commented in a recent note.
Despite this, the Dollar Index has only declined by less than 0.5% over the past week, as the greenback continues to benefit from its status as a safe-haven asset amid heightened geopolitical tensions.
In Syria, rebel forces have ousted President Bashar al-Assad, seizing control of Damascus, while the Middle East remains in turmoil. Meanwhile, the conflict between Ukraine and Russia persists.
Adding to this is political instability in South Korea, a key pillar of the East Asian economy. These factors have supported demand for the US currency.
“There’s little incentive to reduce long dollar positions at this stage. After two weeks of consolidation, we see a higher likelihood of the dollar resuming its bullish trend,” ING analysts noted.
US Inflation Data in Focus
The US consumer inflation report for November, set for release on Wednesday, is expected to shed more light on the Federal Reserve’s future interest rate plans.
Euro Awaits ECB Decision
In Europe, the EUR/USD inched up to 1.0579 as traders awaited Thursday’s European Central Bank (ECB) policy announcement, the final meeting of the year. The ECB is widely anticipated to implement a 25-basis-point rate cut, marking its fourth such move in 2024.
While Eurozone inflation saw a slight uptick in November, it continues to trend toward the ECB’s 2% target, with indications of easing wage pressures. However, the backdrop remains challenging. Since the ECB’s last meeting in October, Europe has faced increased tariff risks following Donald Trump’s election, political instability in France and Germany, and a marked slowdown in business activity.
“The ECB has little to be optimistic about right now, although recent hard data has held up better than expected,” analysts at ING remarked.
Pound Strengthens as BoE Tackles Inflation
The GBP/USD rose 0.3% to 1.2776, with sterling showing resilience as the Bank of England (BoE) grapples with persistently high inflation.
UK consumer prices increased by 2.3% in the 12 months to October, pushing inflation back above the BoE’s target. In response, the central bank cut rates in November for the second time this year. However, it is expected to ease monetary policy at a slower pace compared to its global peers in 2025.
BOJ to Hike Rates?
In Asia, the USD/JPY climbed 0.3% to 150.44 following revised GDP data, which showed Japan’s economy grew slightly more than anticipated in the third quarter, albeit at a slower pace than in the prior quarter. Speculation about the Bank of Japan potentially hiking rates next week continues to influence the yen’s movements.
BOJ Rate Hike Uncertainty Lingers
Investors remain split on whether the Bank of Japan will raise interest rates next week following Monday’s economic growth data.
Dollar Moves Against Asian Currencies
The USD/CNY edged up 0.1% to 7.2748 after data revealed a sharper-than-expected contraction in Chinese consumer inflation for November, despite recent stimulus measures. Producer price inflation also remained subdued, signaling continued economic challenges.
This week, markets will closely watch China’s annual Central Economic Work Conference for potential signals on further stimulus actions by the central bank.
Meanwhile, the AUD/USD jumped 0.9% to 0.6444 ahead of Tuesday’s Reserve Bank of Australia (RBA) meeting. While the RBA is widely expected to hold rates steady, it may adopt a less hawkish tone in light of signs of economic softening in Australia.
In South Korea, USD/KRW gained 0.5% to 1,431.49, approaching a two-year high as the nation’s political turmoil deepened. Prosecutors launched a criminal investigation into President Yoon Suk Yeol on Sunday over his failed attempt to impose martial law last week.
Although Yoon survived an impeachment vote in the opposition-dominated parliament on Saturday, his political future remains uncertain. The leader of his own party indicated that Yoon would be sidelined before eventually stepping down.
