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The US Dollar edged lower in early trading on Tuesday, reflecting thin year-end market activity. However, the greenback remains on track for significant gains in 2024, driven by the Federal Reserve’s cautious stance on interest rate cuts and expectations tied to the incoming Donald Trump administration.
- Dollar Index: Down 0.1% to 107.830 at 05:35 ET (10:35 GMT), just below its two-year high earlier this month. Year-to-date, the index is up nearly 7%, with a 1.5% gain in December.
Key Drivers of Dollar Strength
- Federal Reserve Policy:
- The Fed scaled back its projection for 2025 rate cuts, signaling just two 25 bp reductions instead of four forecasted in September.
- This stance boosted the dollar, supported by higher Treasury yields, including the 10-year yield, which hit a seven-month high last week.
- Trump’s Economic Policies:
- Donald Trump’s election win has bolstered the greenback, with expectations of pro-growth policies such as looser regulation, tax cuts, and tariff hikes.
- These measures are also viewed as inflationary, reinforcing the Fed’s cautious approach.
- Limited Trading Volumes:
- Year-end trading is subdued ahead of Wednesday’s holiday, with focus shifting to economic data later in the week, such as jobless claims and ISM manufacturing PMI.
Global Currency Highlights
- Euro (EUR/USD):
- Slightly higher at 1.0409, but down 6% year-to-date.
- ECB’s aggressive rate-cutting stance, paired with a slowing eurozone economy, continues to weigh on the euro.
- Potential trade tensions with the US under Trump’s leadership add further downside risk.
- British Pound (GBP/USD):
- Down 0.1% to 1.2539, with the UK’s manufacturing sector expected to remain in contraction.
- Economic stagnation and subdued growth have limited upside potential for the pound.
- Chinese Yuan (USD/CNY):
- Up 0.6% to 7.3443, as China’s manufacturing activity expanded for the third straight month in December.
- However, the slightly weaker-than-expected data dampened enthusiasm, with markets awaiting more fiscal stimulus clarity from Beijing.
- Japanese Yen (USD/JPY):
- Up 0.1% to 156.92, nearing a five-month high.
- The Bank of Japan remains hesitant to raise rates, maintaining its key interest rate at 0.25%, further weakening the yen.
Outlook for 2025
- US Dollar: Expected to retain strength amid persistent inflation concerns and a hawkish Fed.
- Euro and Pound: Likely to face headwinds due to softer monetary policy and economic challenges in their respective regions.
- Emerging Markets: Dollar strength could pressure emerging market currencies, particularly if global growth remains uneven.
The interplay between central bank policies, geopolitical developments, and fiscal stimulus will shape currency movements as markets transition into 2025.
