The US dollar experienced a slight dip on Friday but remained poised for its most significant weekly surge in a month. This positive trajectory is fueled by anticipations of continued US economic outperformance on the global stage and the persistence of relatively higher US interest rates.
A consistently strong labor market coupled with persistently high inflation has propelled Treasury yields upward in recent weeks, consequently bolstering demand for the US dollar.
New policies anticipated under the incoming Donald Trump administration, encompassing business deregulation, tax cuts, stricter immigration policies, and tariffs, are also projected to stimulate economic growth and contribute to inflationary pressures. The dollar index, which measures the greenback against a basket of six major currencies, saw a slight decline of 0.28% to 108.91 on Friday, having reached a two-year peak of 109.54 on Thursday. Despite this minor dip, the index is on course for a robust weekly gain of 0.85%.
Notwithstanding recent dollar gains, considerable uncertainty lingers regarding the timing and ultimate impact of the new US government’s policies. This ambiguity could potentially impede the dollar’s rally in the short term. Helen Given, an FX trader at Monex USA in Washington, remarked on the potential for a temporary dollar pullback, citing the time required to implement proposed tariffs and the uncertainty surrounding their full enactment. However, she anticipates renewed dollar strength in the latter half of the year.
Friday’s data release, indicating a closer proximity to recovery for the US manufacturing sector in December, with production rebounding and new orders continuing to rise, briefly tempered the dollar’s losses. The euro, in contrast, faces a weaker growth outlook and potential vulnerability to US tariffs, with the European Central Bank (ECB) projected to implement more aggressive rate cuts than the Federal Reserve this year. Market participants are pricing in 100 basis points of rate cuts by the ECB by year-end, compared to a less certain prospect of 50 basis points of cuts by the Fed.
Furthermore, uncertainties surrounding the French budget debate and German elections are also exerting downward pressure on the single currency. The euro edged up 0.39% to $1.0305 but remained on track for a substantial 1.22% weekly decline, its worst performance since early November. Sterling similarly experienced a 0.41% increase to $1.2431 but faced a potential weekly loss of approximately 1.15%, also its most significant since early November.
The dollar retreated 0.26% against the Japanese yen to 157.11, hovering just below a five-month high of 158.09 reached in December. The Japanese currency has been negatively impacted by the wide interest rate differential between the US and Japan, exacerbated by the Bank of Japan’s cautious stance on further rate increases.
Meanwhile, China’s onshore yuan depreciated to its weakest level in over a year, reaching 7.3199 per dollar, burdened by falling yields and expectations of further domestic rate cuts. In the cryptocurrency market, Bitcoin exhibited a 1.59% gain, reaching $98,658.
