The U.S. dollar surged this week, setting its sights on the best performance in over a month, buoyed by expectations of slower Federal Reserve rate cuts and concerns that President-elect Donald Trump’s policies could stoke inflation.
The dollar index (DXY) climbed to a one-year high of 106.88, poised for a weekly gain of 1.8%—its strongest showing since September. The rally comes as Fed Chair Jerome Powell emphasized the resilience of the U.S. economy, pointing to ongoing growth, a solid labor market, and sticky inflation as reasons to approach rate cuts cautiously.
Markets adjusted expectations accordingly, with Fed fund futures pricing in 71 basis points of rate cuts by the end of 2025, a sharp decrease from earlier projections. Bets for a 25 bps cut at the December meeting fell to just 48.3%, down from 82.5% a day earlier, according to the CME FedWatch tool.
Currency Market Highlights
- Japanese Yen (USD/JPY):
The yen weakened further, trading at 156.65 per dollar, marking a 2.5% weekly decline. This extends its 11% loss since September, pushing deeper into territory that previously triggered intervention from Japanese authorities. Data revealed Japan’s economy grew at an annualized 0.9% in Q3, slowing from prior months, with tepid capital spending as a drag. Analysts suggest the yen’s pace of depreciation could prompt intervention as concerns about market stability grow. - Euro (EUR/USD):
The euro remained under pressure, languishing at $1.0530, close to a one-year low. It’s set to record a 1.75% weekly loss—its worst performance in seven months. Concerns about European Central Bank (ECB) rate cuts and softening economic data continue to weigh on the common currency. - British Pound (GBP/USD):
Sterling slipped to $1.2666, poised for a 2% weekly loss. While labor market data showed resilience in wages, rising unemployment and falling job vacancies supported the Bank of England’s cautious stance on further rate cuts. - Australian and New Zealand Dollars (AUD/USD, NZD/USD):
Both currencies suffered significant declines, with the Aussie at $0.6450 and the Kiwi at $0.5846. Each is down roughly 2% for the week, weighed by dollar strength and weaker-than-expected domestic data.
Bitcoin Surge Pauses
Bitcoin cooled after reaching a record high of $93,480, dipping below the $90,000 mark as some investors took profits. The cryptocurrency has surged nearly 30% over the past two weeks amid optimism for friendlier U.S. regulations under Trump’s administration, which pledged to make the U.S. “the crypto capital of the planet.”
Outlook: Inflation, Tariffs, and Trade Policies Take Center Stage
Trump’s proposed fiscal stimulus, tighter immigration, and higher trade tariffs are projected to fuel inflation, potentially extending the Fed’s cautious approach to rate cuts. Expectations for deeper deficit spending have also lifted U.S. Treasury yields, bolstering the dollar.
With the dollar holding near its highs, traders will keep an eye on upcoming U.S. data and global developments, particularly hints from the Fed and political moves under the Trump administration, to gauge further currency trends.
