The U.S. dollar softened slightly on Friday but remained on course for its strongest weekly performance in a month. Investor optimism about the U.S. economy’s ability to outperform global peers has bolstered the currency, driven by expectations of relatively higher interest rates and strong economic fundamentals. A robust labor market and persistently high inflation have pushed Treasury yields higher in recent weeks, increasing the appeal of the dollar.
Anticipation of new policies under the incoming Trump administration, including deregulation, tax cuts, immigration reforms, and tariffs, has added to expectations of economic growth and inflationary pressures. The dollar index fell by 0.28% on Friday to 108.91 after reaching a two-year high of 109.54 on Thursday. For the week, the index is on track for a 0.85% gain, underscoring its recent strength.
However, uncertainty about the timing and implementation of the new administration’s policies could temper the dollar’s rally in the near term. According to Helen Given, an FX trader at Monex USA, the proposed tariffs and other measures will take time to materialize, and their final impact is not yet clear. She added that while the dollar may experience some pullback initially, its strength is likely to return in the second half of the year.
U.S. manufacturing data on Friday showed signs of recovery in December, with production rebounding and new orders increasing. This helped the dollar briefly pare some of its losses during the day.
Globally, the euro has struggled amid concerns over weaker economic growth and the potential impact of U.S. tariffs. The European Central Bank is expected to cut rates more aggressively than the Federal Reserve this year, with markets pricing in 100 basis points of ECB rate cuts by year-end, compared to only a slight chance of 50 basis points of cuts by the Fed. Political uncertainties, including budget debates in France and elections in Germany, have further weighed on the euro. Despite gaining 0.39% to $1.0305 on Friday, the euro is on track for a 1.22% weekly decline, its sharpest drop since early November.
The British pound also saw a slight rise on Friday, climbing 0.41% to $1.2431. However, it is set to close the week with a 1.15% loss, its largest weekly drop since November. In Asia, the dollar slipped by 0.26% to 157.11 Japanese yen, staying just below a five-month high of 158.09 reached last month. The yen continues to face pressure from the wide interest rate gap between Japan and the United States, as the Bank of Japan remains cautious about further rate hikes.
In China, the yuan fell to its weakest level in over a year, with the onshore rate at 7.3199 per dollar. Declining yields and expectations of further domestic rate cuts have contributed to the currency’s ongoing weakness. Meanwhile, Bitcoin saw a modest gain, rising 1.59% to $98,658 as the cryptocurrency market held steady amid broader economic fluctuations.
