The U.S. dollar headed for substantial weekly gains on Friday, reaching near one-year highs after Federal Reserve Chair Jerome Powell signaled a cautious approach to interest rate cuts, fueling a spike in short-term Treasury yields and leaving Wall Street and European markets under pressure.
On Thursday, Powell indicated that with the U.S. economy still showing strength, a resilient job market, and inflation above the 2% target, there was no immediate need for rate cuts. This tempered expectations for a December rate cut, with Fed fund futures now implying a reduced 61% chance of a December reduction, down from 82.5% the day before.
The dollar’s strength hit major currencies hard, with the euro falling 1.7% for the week to $1.0540, its lowest level in a year, as the European Central Bank (ECB) hinted at further policy easing amid growth concerns. Meanwhile, the Japanese yen dipped further to 156.51 yen per dollar, its weakest point since July, prompting Japan’s finance ministry to issue warnings on excessive currency fluctuations.
Asian markets closed a volatile week with mixed results. Chinese stocks trimmed losses as retail sales outperformed expectations in October, showing a 4.8% rise and offering hope for consumer spending in the world’s second-largest economy. However, other indicators such as industrial output and property investment lagged, reflecting ongoing economic challenges in China. The Hang Seng index in Hong Kong rose 0.9%, while Japan’s Nikkei gained 0.7% as the yen’s depreciation supported Japanese exporters.
On Wall Street, Nasdaq and S&P 500 futures were down 0.4% and 0.3%, respectively, as investors weighed Powell’s cautious outlook on rate cuts. Euro Stoxx 50 futures slipped 0.5% in European markets.
In the commodity sector, the strong dollar pressured prices across the board. Gold prices dropped 4.3% this week to $2,568.55, marking an 8% monthly decline. Oil prices also dipped, with Brent crude set for a weekly loss of 2.3%, closing at $72.15 per barrel.
The impact of the dollar rally underscores global concerns as markets face rising U.S. yields and uncertainty over future rate policy. With Fed policy now less certain, analysts like Kyle Rodda of Capital.com note that “rate hikes and the stronger dollar are muting enthusiasm that initially spiked following the U.S. presidential election,” a reference to the initial market optimism following Donald Trump’s victory.
The market will closely monitor upcoming speeches, including Bank of Japan Governor Kazuo Ueda’s address next week, for any signals on Japan’s potential rate policy shifts, as well as further data releases from China that could impact Asia-Pacific economies.
