The US dollar pulled back on Friday, but remained poised for a strong weekly performance, supported by expectations of US economic strength and fewer Federal Reserve rate cuts this year.
At 04:20 ET (09:20 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, was down by 0.3% at 108.900, after reaching a two-year high in the previous session.
Despite the dip, the index is on track for weekly gains of around 1%, its best performance in over a month, as traders continue to anticipate a more hawkish Fed and a resilient US economy.
US manufacturing activity data for December, as reported by S&P Global, exceeded expectations on Thursday, setting the stage for the more closely watched Institute for Supply Management’s report due later in the day. This report is expected to show a slight dip to 48.2 from a five-month high of 48.4 in November. It marks the eighth consecutive month the measure has been below the 50-point threshold, though it remains above the 42.5 level that the ISM associates with broader economic growth.
Markets are also eyeing the upcoming monthly jobs report, scheduled for the end of next week, ahead of the Fed’s next meeting at the end of the month.
“Markets are fully expecting a pause in January,” said analysts at ING in a note. “If the dot plot serves as a guide for rate expectations over the next three months, the bar for a data surprise that could challenge the dollar’s significant rate advantage is set quite high.” Euro rebounds but faces significant weekly loss
In Europe, EUR/USD rose by 0.2% to 1.0282, recovering slightly after dropping nearly 1% in the previous session to a more than two-year low.
The euro was supported by data showing that the number of unemployed people in Germany increased less than expected in December.
However, the single currency is still set for a weekly decline of about 1.5%, its worst performance since November, after data released on Thursday indicated that manufacturing activity in the eurozone contracted at a faster pace at the end of the year.
Traders are anticipating more interest rate cuts from the European Central Bank in 2025, with markets pricing in at least 100 basis points of easing.
GBP/USD climbed 0.2% to 1.2406, recovering from a 1% drop on Thursday, but still on track to lose around 1.4% for the week.
The Bank of England kept interest rates unchanged last month after consumer prices exceeded their target, and traders expect about 60 basis points of rate cuts in 2025.
Yuan weakens after reports of PBOC rate cuts
In Asia, USD/CNY rose by 0.7% to 7.3523, reaching its highest level since September 2023.
The Financial Times reported that the People’s Bank of China (PBOC) plans further interest rate cuts in 2025, as the central bank shifts to a more traditional monetary policy structure with a single benchmark interest rate.
This policy shift follows a series of liquidity measures that have largely failed to stimulate China’s economy over the past two years. Meanwhile, USD/JPY dipped 0.2% to 157.18, after reaching a more than five-month high in late December, driven by a generally dovish outlook for 2025 from the Bank of Japan.
