The dollar was poised for its strongest weekly performance in over a month on Friday, supported by reduced expectations for Federal Reserve rate cuts this year and a belief that the U.S. economy will continue to outperform its global peers.
The greenback kicked off the new year with momentum, reaching a more than two-year high of 109.54 against a basket of currencies on Thursday, extending its impressive rally from last year.
This upward surge has been driven by a more hawkish Federal Reserve and the resilience of the U.S. economy.
“Dollar strength looks set to persist in early 2025, supported by the narrative of U.S. exceptionalism and high yields,” said Charu Chanana, chief investment strategist at Saxo. “Additionally, uncertainty surrounding the incoming (Donald) Trump administration’s policies adds a safety appeal to the dollar.”
With President-elect Trump’s inauguration scheduled for Jan. 20, markets are treading cautiously due to the unpredictability of his proposed measures, such as steep import tariffs, tax cuts, and immigration restrictions. This cautious sentiment has further bolstered the dollar as a safe-haven asset.
The dollar index was last at 109.17, on track for a weekly gain of just over 1%, marking its strongest performance since November.
Among the hardest hit was the euro, which plunged 0.86% in the previous session to a more than two-year low of $1.0225. “For the eurozone, higher U.S. tariffs on China could indirectly weaken the region, alongside potential direct impacts from trade restrictions,” said Kyle Rodda, senior financial market analyst at Capital.com. The euro last traded at $1.0270, set for a 1.6% weekly decline, its worst since November.
Sterling ticked up 0.09% to $1.2391 after a 1.16% drop on Thursday. It was on course for a 1.6% weekly loss.
The dollar’s dominance was also bolstered by the prospect of widening rate differentials between the U.S. and other regions. Markets are pricing in about 45 basis points of Fed rate cuts this year, compared to over 100 basis points expected from the European Central Bank and around 60 basis points from the Bank of England.
Elsewhere, the yen gained 0.14% to 157.30 per dollar but remained close to a five-month low of 158.09 reached in December. For over two years, the Japanese yen has suffered from the wide interest rate gap between the U.S. and Japan, compounded by the Bank of Japan’s reluctance to raise rates further. The yen lost over 10% in 2024, marking its fourth consecutive year of decline.
The Australian dollar edged up 0.2% to $0.6216 but hovered near a two-year low and was set to decline 0.2% for the week. Similarly, the New Zealand dollar rose 0.16% to $0.5606 but faced a 0.66% weekly loss.
