Dollar Strengthens on Expectations of US Economic Outperformance
The US dollar is poised to post its strongest weekly gain since early November, driven by expectations of a robust US economy and higher interest rates. Despite a slight dip on Friday, the dollar index remains on track for a 0.94% weekly gain, buoyed by a solid labor market and persistent inflation.
Treasury Yields and Dollar Demand on the Rise
In recent weeks, Treasury yields have surged, fueling demand for the US currency. The prospect of new policies under the incoming administration, including business deregulation, tax cuts, and tariffs, is expected to boost growth and add to price pressures. This has led to a significant increase in demand for the dollar, pushing it to a two-year high of 109.54 on Thursday.
Uncertainty Surrounds Policy Implementation
However, there is still considerable uncertainty surrounding the timing and impact of these policies. This uncertainty could lead to a temporary pause in the dollar’s rally in the near term. According to Helen Given, FX trader at Monex USA, “We’re likely to see a bit of a dollar pullback as the administration comes in because all these proposed tariffs – they’re going to take some time to implement and we don’t actually know if all of these proposals are going to be implemented or not.”
Euro Faces Weaker Growth Outlook
In contrast, the euro faces a weaker growth outlook and may be hurt by US tariffs. The European Central Bank is expected to cut rates further than the Federal Reserve this year, which could lead to a decline in the euro’s value. Traders are pricing in 100 basis points rate cuts by the ECB by year-end, and only a less than certain chance of 50 basis points of cuts by the Fed. Uncertainties surrounding the French budget battle and German elections are also weighing on the single currency.
Sterling and Yen Struggle
Sterling gained 0.15% to $1.2399 but was headed for a 1.39% weekly decline, its worst since early November. The dollar slid 0.15% to 157.29 Japanese yen, holding just below a five-month high of 158.09 reached in December. The Japanese currency has suffered from the wide interest rate differential between the US and Japan, with the Bank of Japan’s caution over further rate increases spelling more pain for the yen.
Chinese Yuan Hits One-Year Low
China’s onshore yuan hit its weakest level in over a year at 7.3199 per dollar, as falling yields and expectations of more domestic rate cuts continued to weigh on the currency.
Cryptocurrencies Take a Hit
In the world of cryptocurrencies, bitcoin fell 0.15% to $96,969, adding to its recent losses.
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