Forex
Dollar retains strength ahead of CPI, Fed speakers; euro heads lower
Investing.com – The U.S. dollar rose Monday, continuing the positive tone generated by the new Trump presidency ahead of the release of key inflation data and with a number of Federal Reserve speakers due this week.
At 04:20 ET (09:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 105.207, after gaining 0.6% last week.
Dollar maintains strength
The dollar surged to a four-month high last week after Donald Trump claimed a return to the White House, with its tariff and immigration policies seen as inflationary, and thus likely to prompt the Federal Reserve to reduce rates at a slower and shallower pace.
While the greenback’s rally was stalled by an interest rate cut by the Federal Reserve, it still retained a bulk of its recent gains.
“The thesis for dollar bears now is that it will take a while for tariffs to come through and the Federal Reserve’s recalibration to less restrictive monetary policy – plus end-year dollar seasonal patterns – could see a benign decline in the dollar into year-end,” said analysts at ING, in a note.
“We disagree and think this clean election result can boost US consumer and business sentiment at the same time as it weighs on business sentiment elsewhere in the world.”
Trading is likely to be light Monday (NASDAQ:) with U.S. bond markets closed for a public holiday, with attention turning to the release of data for October, due on Wednesday.
A slew of Federal Reserve officials are also set to speak this week, after the bank cut interest rates by 25 basis points last week.
Euro heading lower
In Europe, dropped 0.3% to 1.0688, weighed by Trump’s proposals for tariffs on imports, which could hurt European exports, as well the political turmoil in Germany, the eurozone’s biggest economy.
German Chancellor Olaf Scholz last week sacked his finance minister, paving the way for a snap election after months of disagreements in his three-party coalition.
The latest reports suggest “a no-confidence vote could be held in December and a snap election as early as February. It seems a leap of faith at this stage to expect a complete turnaround in the German fiscal position and instead the onus will be on the European Central Bank to support the eurozone economy,” ING added, expecting the ECB to cut by 50 basis points in December.
fell 0.2% to 1.2900, after the delivered its second rate cut since 2020 on Thursday, dropping by 25 basis points to 4.75% from 5%.
BoE Governor Andrew Bailey makes an important Mansion House speech on Thursday, as traders look for monetary policy guidance in the wake of the Labour government’s expansionary budget.
“Given that the UK economy has been performing quite well and Donald Trump’s policies could prove inflationary, Bailey may not want to repeat his narrative that UK rates could be cut faster than expected,” said ING.
Yuan slips after new debt package
climbed 0.2% to 7.1934, remaining close to three-month highs after China’s National People’s Congress outlined plans for more fiscal spending.
The NPC approved a 10 trillion ($1.4 trillion) debt package last week, aimed at easing local government debt levels. But the measure disappointed investors hoping for more targeted, fiscal measures.
rose 0.8% to 153.83, with the yen falling after the Bank of Japan’s October meeting showed policymakers were split over more interest rate hikes, sparking more uncertainty over when the BOJ will raise interest rates further.
This uncertainty bodes poorly for the yen, which was already battered by increased political uncertainty in Japan after the country’s ruling Liberal Democratic Party lost its parliamentary majority last month.
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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