Dollar Eases Slightly But Remains Poised for Substantial Yearly Gains
The US dollar experienced a minor dip on Monday, attributed to a retreat in US bond yields. However, the greenback maintained its position near recent highs as the year draws to a close, remaining on track for impressive annual gains. The Dollar Index, a benchmark measuring the dollar’s performance against a basket of six major currencies, registered a 0.1% decrease to 107.690. Despite this slight decline, the index is projected to achieve monthly gains exceeding 2%, contributing to a year-to-date surge of nearly 7%.
The dollar’s robust performance throughout the year has been fueled by escalating US Treasury yields, with the benchmark 10-year note reaching a seven-month peak last week before easing slightly to 4.599% on Monday. The election of Donald Trump further bolstered the dollar’s ascent. Market analysts perceive his policy agenda, encompassing deregulation, tax reductions, tariff increases, and stricter immigration controls, as both growth-stimulating and inflationary. These factors are anticipated to deter the Federal Reserve from implementing rapid interest rate cuts in the near future.
The Federal Reserve’s latest projections, released at its December policy meeting, indicate only two 25 basis point rate cuts are anticipated in 2025. Current market pricing aligns with this forecast, anticipating approximately 35 basis points of easing for 2025. With the holiday season upon us, trading activity is expected to remain subdued this week. Market focus will center on Thursday’s weekly jobless claims numbers and Friday’s PCE data, alongside any pronouncements from FOMC member Patrick Harker.
Euro Rebounds Modestly Following Spanish Inflation Data
Across the Atlantic, the euro saw a marginal 0.1% increase to 1.0439 against the dollar, recovering slightly after data revealed a rise in Spain’s annual EU-harmonized inflation to 2.8% in December, up from 2.4% in November. The European Central Bank (ECB) recently implemented an interest rate cut and signaled further reductions as economic growth in the region stagnates. However, recent inflationary pressures may delay the next anticipated rate cut, as indicated by ECB Governing Council member Robert Holzmann. Eurozone inflation accelerated to 2.2% in November, exceeding the ECB’s 2% target rate.
The British pound also experienced a modest 0.1% gain against the dollar, reaching 1.2595. Market attention is directed towards Thursday’s PMI release, which is projected to confirm the UK manufacturing sector’s continued contraction in December. This follows recent data indicating zero growth in the British economy during the third quarter. The Bank of England’s recent decision to maintain interest rates, with a more dovish than expected 6-3 vote split, suggests further rate cuts are likely in the coming year.
Yen Remains Weak; Intervention Risk Provides Support
In Asian markets, the Japanese yen traded relatively flat against the dollar at 157.76, hovering near five-month highs. The potential for Japanese intervention remains the primary factor preventing the yen from testing the 160 level last witnessed in July. The Bank of Japan has indicated a cautious approach to future interest rate hikes following its decision to hold rates steady at 0.25% at its December meeting.
The Chinese yuan weakened slightly against the dollar, trading at 7.3136, near a one-year low. The prospect of increased fiscal spending and looser monetary policy in the coming year continues to weigh on the currency. These developments highlight the complex interplay of economic factors influencing global currency markets as the year concludes.
