US Dollar Gains Amid Thin Holiday Trading, Supported by Hawkish Fed Outlook

The US dollar extended its recent rally on Tuesday, buoyed by the Federal Reserve’s hawkish stance, even as holiday-thinned trading conditions kept market activity subdued.

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Key Highlights

Dollar Index Near Two-Year High

The Dollar Index, which measures the greenback against six major currencies, rose 0.1% to 107.905, staying near a two-year high reached last week.

• Fed Outlook: The Federal Reserve’s projection of only two 25-basis-point rate cuts in 2025 has underpinned the dollar’s strength.
• Treasury Yields: Higher US Treasury yields have bolstered the dollar, with the 2-year yield at 4.34% and the 10-year yield steady at 4.59%.
• Analyst View: ING analysts predict sustained dollar strength heading into 2025, given the Fed’s hawkish policy tone.

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Euro and Sterling Under Pressure

• EUR/USD: Dropped 0.1% to 1.0396, hovering near a two-year low.
  • The euro remains under pressure as the European Central Bank signals faster rate cuts amid sluggish eurozone growth.
  • ECB President Christine Lagarde noted that inflation is nearing the 2% target, providing room for monetary easing.
• GBP/USD: Traded flat at 1.2531.
  • Weakness in the pound followed data showing stagnation in the UK economy during Q3, alongside a dovish Bank of England rate decision (6-3 vote to hold rates).

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Asian Currencies Mixed

• USD/JPY: Fell 0.1% to 157.03, after nearing a 158-yen level recently.
  • The Bank of Japan signaled a cautious approach to further rate hikes, keeping the yen under pressure.
• USD/CNY: Rose 0.1% to 7.3021, close to a one-year high.
  • Beijing’s plans for increased fiscal spending in 2025 to support economic growth have weighed on the Chinese yuan.

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Market Outlook

With the holiday season reducing trading volumes, the US dollar is likely to retain its strength in the near term. Key factors influencing the dollar’s trajectory include Fed communication, global economic conditions, and fiscal policies in major economies like China.

Market participants will closely watch upcoming economic data and central bank decisions for further direction heading into 2025.