The U.S. dollar strengthened on Tuesday, buoyed by the Federal Reserve’s signal that high interest rates are likely to persist, leaving other major currencies struggling near milestone lows.
In a quiet week for economic data and with year-end trading volumes thinning, the foreign exchange market remains focused on interest rate policies. The dollar index, which measures the greenback against a basket of currencies, hovered near a two-year high of 108.54, last settling at 108.10.
The Japanese yen was pinned near a five-month low at 157.19 per dollar, after falling 4.7% this month. The yen’s weakness has raised concerns of potential intervention by Japanese authorities, though none has been forthcoming so far.
Last week, the Bank of Japan (BOJ) held rates steady and remained vague about future hikes, in stark contrast to the Federal Reserve’s hawkish tone. The Fed signaled a cautious approach to rate cuts in 2025, which has widened the policy divergence between the two central banks and further weakened the yen.
“Policy divergence is now more likely to weaken the yen further,” noted Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho Bank.
The euro traded at $1.0403, not far from a two-year low reached in November, while the British pound slipped marginally to $1.2534.
The Australian dollar fell 0.11% to $0.6242, and the New Zealand dollar edged down 0.04% to $0.5648. The Reserve Bank of Australia (RBA) is set to release minutes from its December policy meeting, where it unexpectedly hinted at potential rate cuts next year.
Despite recent benign U.S. inflation data, markets are pricing in only modest Federal Reserve rate cuts for 2025, further bolstering the dollar. Analysts expect the greenback to remain strong as the U.S. economy continues to outperform its global peers.
Jonas Goltermann, deputy chief markets economist at Capital Economics, projected further dollar gains in 2024, citing widening interest rate differentials and anticipated protectionist policies under President-elect Donald Trump’s administration, including higher tariffs and tax reforms.
As the year-end approaches, uncertainty surrounding central bank policies and geopolitical developments continues to shape the global currency market.
