Dollar Strengthens Amidst Easing Expectations and Weak UK Growth
The US dollar surged on Friday, poised for its most robust weekly performance in a month, as market participants tempered their expectations for substantial US policy easing in the coming year. Concurrently, disappointing economic data from the UK exerted downward pressure on the British pound. The Dollar Index, which gauges the greenback’s value against a basket of six major currencies, climbed 0.1% to 106.780, setting the stage for a weekly gain of approximately 1%. This ascent followed the release of stronger-than-anticipated US inflation figures, fueling concerns about persistent price stickiness into 2025. Adding to these inflationary pressures is the incoming President Donald Trump’s proposed trade and tax policies, which have the potential to further stoke price increases.
This cautious approach to Federal Reserve easing in 2025 diverges significantly from the actions taken by other major central banks. Recent days have witnessed a flurry of rate cuts, including substantial 50 basis point reductions in Switzerland and Canada, and a 25 basis point cut by the European Central Bank. Analysts at ING highlighted this divergence, noting the dollar’s resilience despite typical seasonal trends favoring weakness. They attributed this strength to the anticipation of Trump’s policy agenda, which is maintaining wide dollar rate spreads and placing pressure on the currencies of trading partners. This dynamic is expected to persist until Trump’s inauguration in January.
Across the Atlantic, the euro experienced a modest 0.1% rise to 1.0473 against the dollar, recovering slightly from a sharp decline following Thursday’s European Central Bank (ECB) policy meeting. The ECB, as anticipated, cut rates by 25 basis points. However, the prevailing economic weakness in the region suggests the likelihood of further rate cuts in the new year. This projection was confirmed by ECB policymaker and Bank of France head Francois Villeroy de Galhau, who stated that further rate cuts are on the horizon in 2025. Villeroy emphasized the absence of a predetermined trajectory for rate cuts, noting the market’s general alignment with current interest rate forecasts. ING analysts concurred, predicting a downward trend for eurozone rates, potentially extending beyond the neutral range of 2.00% to 2.25%.
The British pound faced significant headwinds, falling 0.3% to 1.2633 against the dollar, after data revealed a further contraction in the UK economy during October. The UK GDP shrank by 0.1% in October, mirroring the previous month’s decline and resulting in an annual growth rate of 1.3%. This performance fell considerably short of expectations, which had projected a 0.1% rise in October and an annual growth rate of 1.6%. This weak economic performance underscores the persistent challenges facing the UK economy.
In Asian markets, the Chinese yuan edged up 0.3% to 7.2878 against the dollar, hovering near a two-year high. This followed the conclusion of China’s two-day Central Economic Work Conference, which left markets somewhat disappointed by the lack of aggressive stimulus measures. The Japanese yen also strengthened, gaining 0.6% to 153.50 against the dollar, following media reports suggesting that the Bank of Japan (BOJ) is likely to maintain its current interest rates next week. This contrasts with earlier expectations of a rate hike. The upcoming BOJ meeting will be closely watched for confirmation of this policy stance.
The global currency landscape remains dynamic, with the US dollar exhibiting resilience against a backdrop of easing expectations and diverging central bank policies. The economic performance of major economies, particularly the UK and the eurozone, continues to influence currency movements, while market participants await further policy signals from central banks, including the upcoming Bank of Japan meeting. The interplay of these factors will shape currency trends in the coming weeks and months.
