The U.S. dollar is set to notch its strongest weekly performance in over a month, driven by expectations of a slower pace of Federal Reserve rate cuts and confidence in the resilience of the U.S. economy compared to global peers.
The dollar index surged to a two-year high of 109.54 on Thursday, extending its robust rally from the previous year. This strength is underpinned by a hawkish Federal Reserve stance and continued economic outperformance in the U.S.
“The narrative of U.S. exceptionalism remains intact as we head into 2025,” said Charu Chanana, chief investment strategist at Saxo. “With elevated U.S. yields and rising uncertainty surrounding the incoming Trump administration’s policies, the dollar’s appeal as a safe-haven asset is reinforced.”
President-elect Donald Trump’s impending return to office on January 20 has added an element of caution to markets, with potential policy shifts on tariffs, taxes, and immigration contributing to the greenback’s attractiveness as a secure investment.
The dollar index was last seen at 109.18, poised for a weekly gain of 1.1%, marking its best performance since November.
Euro and Sterling Struggle Against the Dollar
The euro bore the brunt of the dollar’s ascent, plummeting 0.86% on Thursday to a two-year low of $1.022475. It was on track for a weekly decline of 1.6%, its steepest since November. Analysts highlighted the eurozone’s vulnerability to higher U.S. trade tariffs and the indirect effects of China’s economic slowdown, which could further weaken the bloc’s economy.
Meanwhile, the British pound edged up 0.04% to $1.2385 on Friday but was still set to lose approximately 1.6% for the week, mirroring the euro’s struggles against a dominant dollar.
Rate Differentials Widen
The dollar’s strength is also buoyed by expectations of widening rate differentials between the U.S. and other major economies. Traders anticipate just 44 basis points of rate cuts from the Fed in 2025, compared to over 100 basis points of easing from the European Central Bank and roughly 60 basis points from the Bank of England.
In Japan, the yen rose slightly to 157.25 per dollar on Friday but remained near a five-month low of 158.09. The Japanese currency has been under sustained pressure due to the significant interest rate differential between the U.S. and Japan. The yen fell more than 10% in 2024, marking its fourth consecutive year of losses, as the Bank of Japan maintained its cautious approach to rate hikes.
Commodity Currencies Lag
The Australian dollar gained 0.2% to $0.6216 but hovered near its lowest level in over two years and was set to decline 0.2% for the week. Similarly, the New Zealand dollar inched up 0.17% to $0.56065 but was on track for a weekly loss of 0.66%.
As markets digest a complex mix of economic resilience, central bank policies, and geopolitical uncertainty, the dollar continues to assert dominance, signaling its enduring role as a global safe-haven currency.
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