Currency Markets See Shift as Fed Rate Cut Expectations Diminish
The US dollar has been on a tear, hovering near a two-year high, as traders reassess the likelihood of fewer rate cuts from the Federal Reserve in 2025. This shift in sentiment has been driven by inflation remaining above the Fed’s 2% annual target, coupled with expectations of growth-boosting policies from the incoming US administration.
Dollar Strengthens Against Yen and Euro
The dollar index is poised for a 6.7% gain this year, with a recent high of 108.54 on December 20. Against the Japanese yen, the dollar is on track for an 11.4% return, its fourth consecutive yearly increase. The yen, meanwhile, has struggled due to the significant interest-rate differential between Japan and the US.
Yen’s Fate Tied to Bank of Japan Rate Hikes
Some analysts believe the yen could benefit from expected Bank of Japan interest-rate hikes next year, particularly if the Fed eases its monetary policy. However, with US Treasury yields continuing to rise, this has yet to be reflected in the exchange rate. According to Fawad Razaqzada, market analyst at City Index, “Above-target inflation could increase further if the yen weakens, prompting the Bank of Japan to raise rates more meaningfully to support its currency.”
Euro and Sterling Struggle Against Dollar
The euro is heading for a 5.7% drop against the dollar this year, following the European Central Bank’s four interest rate cuts in 2024. Markets expect the ECB to take a more aggressive approach to rate cuts than the Fed in 2025. The euro was last down 0.29% at $1.0397. Sterling, meanwhile, fell 0.21% to $1.2552 and is on pace for an annual loss of 1.2%.
Bitcoin Sees Correction After Record High
Bitcoin, which has surged about 116% this year, fell 2.30% to $92,211, correcting from its record high of $108,379.28 on December 17.
Central Banks’ Policy Decisions in Focus
As traders look ahead to 2025, central banks’ policy decisions will remain a key driver of currency markets. The Bank of Japan’s potential rate hikes, the ECB’s pace of rate cuts, and the Fed’s stance on inflation will all be closely watched. Additionally, Japanese officials’ warnings about excessive currency moves have raised the possibility of intervention to support the yen.
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