Forex
Dollar holds firm as US rates outlook still dominates
By Rae Wee and Greta Rosen Fondahn
SINGAPORE (Reuters) -The dollar defended its recent dominance on Tuesday in a holiday-lined week, as investors considered the prospect of higher-for-longer U.S. interest rates, leaving other major currencies struggling near milestone lows.
The U.S. dollar has leaped ahead over the past three months against a basket of currencies, fuelled by diverging central bank outlooks.
After its policy meeting on Wednesday, the U.S. Federal Reserve now looks set to hold rates higher for longer than markets had expected, elevating U.S. Treasury yields and sending the currency 1.2% up to two-year peaks.
Trading volumes are likely to thin out this week as the year-end approaches, and major economic data releases are scarce, meaning the rates theme is likely to remain the main driver of moves in the foreign exchange market.
The held up firm on the day, 0.1% higher at 108.2, still hovering close to the two-year high of 108.54 it reached on Friday.
Other currencies took a breather on Tuesday, but the impact of the dollar’s recent rally was still felt across the board.
The euro was last bought at $1.0393, slightly lower on the day and not far from November’s two-year low, while sterling hovered around a one-month low at $1.2532.
Elsewhere, the yen was pinned near a five-month low and last stood at 157.04 per dollar, having already fallen close to 5% this month into territory that is keeping traders on alert to any intervention from Japanese authorities.
The Bank of Japan (BOJ) last week kept rates on hold and stayed vague on when it could next raise them. The central bank communication stood in stark contrast to the Federal Reserve’s hawkish tone a day earlier, when it projected a measured pace of rate cuts in 2025, sending the yen sliding.
“The shifts in Fed-BOJ policy divergence are now more likely to weaken the JPY,” said Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho (NYSE:) Bank.
“JPY carry trades could, in defiance of a step-up in volatility or uncertainty, remain in play as two critical factors – supported ‘carry returns’ and mitigated capital risks of JPY squeeze – conspire favourably.”
Down Under, the Australian dollar eased 0.19% to $0.6237, while the New Zealand dollar dipped 0.16% to $0.5641.
The Reserve Bank of Australia (RBA) released the minutes of its December policy meeting on Tuesday, which signalled the central bank was closer to cutting interest rates, but needed the flow of economic news to support its confidence that inflation was slowing.
DOLLAR AHEAD
The greenback looked set to end the year more than 6% higher, after falling back last year.
While a benign U.S. inflation reading on Friday eased concerns about the pace of Fed cuts next year, markets are still pricing in just about 35 basis points worth of easing for 2025, in turn underpinning the dollar.
“Our base case is that the dollar will make some further headway next year as the U.S. continues to outperform, the interest rate gap between the U.S. and other G10 economies widens a little further, and the Trump administration brings in higher U.S. tariffs,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.
Ahead of U.S. President-elect Donald Trump’s return to the White House in January, global central banks have urged caution over their rate paths due to uncertainty on how Trump’s planned tariffs, lower taxes and immigration curbs might affect policy.
Goldman Sachs said it was uncertain how tariffs could affect future Fed policy, adding that the inflation impact of price increases should fade after a year.
“The 2018-2019 trade war tightened financial conditions by enough to prompt an easing in Fed policy,” Goldman Sachs added.
“Much about the current cycle is different, but the 2018-2019 experience shows that the monetary policy risks from tariffs are at a minimum two-sided.”
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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