The US dollar is expected to post an annual gain of nearly 7%, while the Japanese yen was on track for a fourth straight year of losses on Friday, as traders expect strong US growth to prompt the Federal Reserve to be more cautious about cutting interest rates through 2025.
The US dollar index, which measures the currency against major currencies, rose 0.08% to 108.06, close to a monthly gain of 2.2% and is expected to close 2025 with a 6.6% gain.
The dollar is also close to a 5.5% gain this month against the yen and an 11.8% gain for 2024 against the weaker Japanese currency, while the euro remains near a two-year low.
Fed Chairman Jerome Powell said earlier this month that U.S. central bankers “will be cautious about any additional cuts” after the expected quarter-point rate cut.
The U.S. economy is also grappling with the fallout from Donald Trump’s proposed tax cuts, tariff hikes and tighter immigration policies that economists see as boosting growth and inflation.
Meanwhile, traders expect the Bank of Japan to maintain loose monetary policy and the European Central Bank to implement further rate cuts.
The yen on Friday was at a level last seen in July of 157.75 per dollar, while the euro was trading at $1.042, just above a low of around $1.04 hit on Dec. 18.
Traders are expecting a 37-basis-point U.S. rate cut in 2025, with no full cut expected until June, when the ECB is expected to have cut its deposit rate by a full point to 2% as the eurozone economy slows.
The Bank of Japan has not raised interest rates this month. Governor Kazuo Ueda said he chose to wait for clarity on Trump's policy, reflecting growing concern among central banks around the world about US tariffs affecting global trade.
For now, the dominance of US equities in global indices and weaker currencies in Asia and Europe that have helped boost exports have kept US tight monetary policy from hurting global stocks.
