Dollar Strengthens as Markets Prepare for Trump Administration’s Policies
As the year comes to a close, the US dollar is poised to end 2024 on a strong note, with investors bracing for a potential shift in monetary policy under the incoming Trump administration. The dollar’s ascent, fueled by rising Treasury yields, has pushed the Japanese yen to its lowest levels since July, with the currency on track for a 10% decline against the dollar this year.
Interest Rate Expectations Drive Dollar’s Rise
The Federal Reserve’s surprise decision to cut its interest-rate forecast for 2025 has led traders to reassess their bets on deep rate cuts next year. Goldman Sachs strategists predict three rate cuts from the Fed in 2025, citing expectations that inflation will continue to trend lower. However, the dollar’s strength suggests that investors are pricing in a more hawkish stance from the central bank.
Trump’s Policies to Boost US Yields
Expectations of President-elect Donald Trump’s policies, including looser regulation, tax cuts, and tighter immigration, are seen as pro-growth and inflationary, which could keep US yields elevated. This has led to a divergence in interest rates between the US and other economies, putting pressure on emerging market currencies.
Euro and Yen Suffer as Dollar Strengthens
The euro is set for a 5.7% decline against the dollar this year, with traders expecting the European Central Bank to be more aggressive with its rate cuts than the Fed. The yen, meanwhile, has breached multi-decade lows twice this year, prompting intervention from Tokyo. The Bank of Japan has held interest rates steady, but traders are watching for signs of intervention as the currency approaches 157 per dollar.
Sterling and Commodity Currencies Struggle
Sterling was little changed, on course for a 1% fall in 2024, while the risk-sensitive Australian and New Zealand dollars were tentative, sticking close to their two-year lows. The Aussie is set for a drop of 8.7% this year, its weakest yearly performance since 2018, while the kiwi is poised for a decline of nearly 11% in 2024, its softest performance since 2015.
Cryptocurrencies End Year on a High
In cryptocurrencies, bitcoin inched higher, well below its record high of $108,379.28. The world’s best-known cryptocurrency is set for a bumper 117% rise for the year, despite recent volatility. As markets enter the new year, investors will be watching closely for signs of how the Trump administration’s policies will impact the global economy and financial markets.
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