The US dollar fell on Friday, but remained on track for a strong weekly performance, boosted by expectations that the US economy will continue to lead the way, reducing the pace of interest rate cuts by the Federal Reserve this year.
The US Dollar Index, which tracks the greenback's performance against a basket of six major currencies, fell 0.3% to 108.900, after hitting a more than two-year high in the previous session.
The index is on track for a weekly gain of around 1%, its best performance in more than a month, as traders continue to weigh in on a more hawkish Fed policy and a strong US economy.
US manufacturing activity data for December, as determined by S&P Global, came in stronger than expected on Thursday, setting the stage for the much-awaited Institute for Supply Management (ISM) data due later.
The data is expected to have slowed slightly to 48.2 last month, down from a five-month high of 48.4 in November. This is the eighth consecutive month that the measure has been below the 50-point threshold, although the figure is still above the 42.5 level that the ISM considers a sign of broader economic expansion.
Markets will also be focusing on a key monthly jobs report later next week, with the Fed’s next meeting scheduled for later this month.
“The market is fully expecting no rate change in January,” said analysts at ING.
In European markets, EUR/USD rose 0.2% to 1.0282, rebounding slightly after falling nearly 1% in the previous session to its lowest level in more than two years.
The single currency was supported by data showing that unemployment in Germany rose less than expected in December.
However, the euro is still on track for a weekly decline of around 1.5%, its worst since November, after data on Thursday showed manufacturing activity in the eurozone contracted at a faster pace in late 2024.
Traders are expecting more interest rate cuts by the European Central Bank in 2025, with markets pricing in at least 100 basis points of cuts.
GBP/USD rose 0.2% to 1.2406, after falling more than 1% on Thursday, and is on track for a decline of around 1.4% for the week.
The Bank of England kept interest rates unchanged last month after consumer prices rose above target, and traders expect around 60 basis points of rate cuts by the Bank of England in 2025.
In Asia, USD/CNY rose 0.7% to 7.3523, with the pair rising to its highest level since September 2023.
The Financial Times reported that the PBOC will cut interest rates further in 2025, as the central bank shifts to a more conventional monetary policy structure under a single benchmark interest rate.
The monetary policy reform comes after various previous liquidity measures failed to stimulate China’s economy over the past two years.
USD/JPY fell 0.2% to 157.18, after hitting a more than five-month high in late December, supported by a dovish outlook for 2025 from the Bank of Japan.
