The US dollar maintained its dominance on Tuesday in a holiday-filled week, as investors weighed the prospect of US interest rates staying high for longer, leaving other major currencies struggling at key lows.
The US dollar surged to a three-month high against a basket of major currencies, driven by divergences in central bank views.
After a policy meeting on Thursday, the US Federal Reserve now appears poised to keep interest rates higher than market expectations, raising US Treasury yields and sending the currency 1.2% stronger to a two-year high.
Volume is expected to ease this week as the end of the year approaches, and key economic data releases are limited, leaving the interest rate theme to remain the main driver of foreign exchange market movements.
The US dollar index held firm on the day, gaining 0.1% to 108.2, still close to a two-year high of 108.54 hit on Friday.
Other major currencies took a breather on Tuesday, but the effects of the US dollar’s recent surge are still being felt.
The euro was at $1.0393, slightly lower and not far from a two-year low hit in November, while the pound sterling was at a one-month low of $1.2532.
On the other hand, the Japanese yen was near a five-month low and last stood at 157.04 per US dollar, having fallen almost 5% this month, sparking traders’ wariness of any intervention from Japanese authorities.
Last week, the Bank of Japan (BOJ) kept rates unchanged and gave no clear indication of further hikes, contradicting the Federal Reserve’s hawkish tone a day earlier, which suggested a measured rate cut in 2025.
“The policy divergence between the Fed and the BOJ is now more likely to weaken the JPY,” said Vishnu Varathan, head of macro research for Asia excluding Japan at Mizuho Bank. In Australia, the Australian dollar fell 0.19% to $0.6237, while the New Zealand dollar fell 0.16% to $0.5641.
The Reserve Bank of Australia (RBA) released minutes of its December policy meeting on Tuesday, which showed the central bank is moving closer to cutting interest rates, but needs economic news to support its belief that inflation is slowing.
The US dollar looks set to finish the year up more than 6%, after falling last year.
A subdued US inflation reading on Friday eased concerns about a Fed rate cut next year, but markets still expect about 35 basis points of cuts by 2025, which in turn supports the US dollar.
“Our fundamental view is that the dollar will continue to strengthen next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens, and the Trump administration introduces higher US tariffs,” said Jonas Goltermann, deputy chief market economist at Capital Economics.
