Dollar Strengthens to Two-Year High as Yen and Global Currencies Struggle

The U.S. dollar ended the week on a high note, hitting a two-year peak as hawkish signals from the Federal Reserve continued to bolster its appeal. In contrast, global currencies faced significant pressure, with the yen, sterling, and commodity-linked currencies like the Australian and New Zealand dollars recording steep losses.

Dollar Dominance Amid Hawkish Fed Outlook

• The dollar index climbed to 108.53, marking a 1.5% weekly gain, driven by expectations that U.S. interest rates will remain elevated longer than previously anticipated.
• Markets are now pricing in fewer rate cuts in 2025, with expectations dropping to less than 40 basis points, reinforcing the greenback’s strength.

Japanese Yen Under Pressure Despite Intervention Hints

• The yen weakened to a five-month low of 157.93 per dollar during Friday’s Asian session before recovering slightly to 156.95 after Japanese officials expressed readiness to intervene against speculative forex moves.
• The Bank of Japan (BOJ) maintained its dovish stance, keeping rates unchanged and offering no clear signal of an imminent hike, even as Japan’s core inflation rose in November, reflecting higher food and fuel costs.

Sterling and Euro Retreat on Central Bank Caution

• The pound fell to a one-month low of $1.2475 before settling at $1.2489, marking a 1% weekly decline.
  • The Bank of England’s (BoE) split vote (6-3) to hold rates steady was interpreted as dovish, prompting traders to increase bets on rate cuts in 2025 to 53 basis points, up from 46 bps earlier.
• The euro slipped to $1.03435, a one-month low, and was poised for a 1.5% weekly drop against the dollar.

Commodity Currencies Sink to Multi-Year Lows

• Australian Dollar (AUD): Dropped 0.12% to $0.6230, on track for a 2% weekly decline, as risk sentiment remained subdued.
• New Zealand Dollar (NZD): Fell 0.08% to $0.56265, also set to end the week over 2% lower.
• Central banks from emerging markets like Brazil and Indonesia scrambled to defend their currencies amid the dollar’s broad-based rally.

Focus on Core PCE Price Index

The market’s attention now shifts to the release of the core Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge. This data is expected to provide further insight into the trajectory of U.S. monetary policy and could reinforce the dollar’s bullish momentum if inflationary pressures persist.

Weekly Recap and Outlook

The dollar’s rally underscores its resilience amid a backdrop of slowing global growth and divergent monetary policies. The BOJ’s dovish stance and the BoE’s caution contrast sharply with the Fed’s hawkish tilt, amplifying the greenback’s strength.

For global currencies, the road ahead remains challenging as central banks face pressure to balance inflation management with economic growth, all while contending with the dollar’s unrelenting dominance.