The U.S. dollar strengthened on Monday, bolstered by robust domestic data and political instability in Europe. As the Federal Reserve evaluates its next policy move, markets are also reacting to escalating geopolitical and economic risks, setting the stage for a volatile end to the year.
U.S. Dollar Gains on Manufacturing Data and Fed Prospects
The greenback surged near a one-year high, with the dollar index (DXY) climbing 0.3% to 106.33. Resilient U.S. manufacturing data helped fuel the rally, as both the Institute for Supply Management (ISM) and S&P Global reported stronger-than-expected activity in November.
- ISM Manufacturing PMI rose to 48.4, up from October’s 46.5.
- S&P Global PMI climbed to 49.7, exceeding initial estimates of 48.8.
Despite these gains, Federal Reserve Governor Christopher Waller reaffirmed his inclination to cut rates by 25 basis points at the December meeting, citing the restrictive nature of current monetary policy. Following his comments, the odds of a December rate cut rose to 79%, up from 66% last week, according to CME’s FedWatch Tool.
Euro Weakens Amid French Political Crisis
The euro (EUR/USD) dropped 1% to $1.0469, its largest daily fall since early November, as political uncertainty in France rattled markets.
The far-right National Rally party, led by Jordan Bardella, signaled support for a no-confidence vote against the interim government. This raises concerns over France’s ability to tackle its ballooning budget deficit.
The yield spread between French and German 10-year bonds widened to 87.3 basis points, reflecting investor unease over French fiscal stability.
Trump’s Policies and BRICS Comments Support the Dollar
President-elect Donald Trump’s remarks on imposing tariffs on BRICS nations and opposing alternative currencies further strengthened the greenback. His comments mark a departure from his prior stance advocating for a weaker dollar.
The Kremlin responded, stating any U.S. attempt to enforce dollar dominance would backfire. However, markets remained focused on the potential inflationary effects of Trump’s proposed policies, which could delay the Federal Reserve’s easing cycle.
JPY and GBP React to Broader Trends
- The Japanese yen (USD/JPY) held steady at 149.37, supported by comments from Bank of Japan Governor Kazuo Ueda hinting at potential rate hikes.
- The British pound (GBP/USD) fell to 1.2626, weighed down by spillover effects from the euro’s weakness and the dollar’s strength.
Looking Ahead: Key Data Points
Markets will closely monitor the U.S. Nonfarm Payrolls report on Friday, with expectations of a 195,000 job increase and a slight uptick in the unemployment rate to 4.2%. This data could shape the Fed’s December decision and set the tone for dollar movements into year-end.
Conclusion
The dollar continues to find support from solid U.S. economic data and geopolitical uncertainty abroad. While the Fed may proceed with gradual rate cuts, strong domestic fundamentals and political risks in Europe could sustain the greenback’s momentum. Traders should watch upcoming U.S. labor market data and geopolitical developments for further direction.
