The U.S. dollar surged into the new year with strong momentum on Thursday, continuing its dominance over most currencies after a year of significant gains. Meanwhile, the Japanese yen slid toward its weakest level in over five months, reflecting persistent speculation about U.S. interest rates remaining elevated.
Investors’ attention is now shifting to the incoming Trump administration, with expectations of pro-growth policies that could also stoke inflation. Such developments are likely to support U.S. Treasury yields and sustain demand for the dollar.
Diverging Interest Rates Shape Currency Trends
A substantial interest rate differential between the U.S. and other major economies has heavily influenced currency markets, contributing to sharp declines against the dollar in 2024.
The yen, particularly, suffered a notable blow, falling over 10% last year in its fourth consecutive annual decline. By the first trading day of 2025, the yen stood at 157.54 per dollar, close to a five-month low reached earlier in the week. The decline has heightened concerns about potential intervention by Japanese authorities. Notably, Japanese markets are closed for the remainder of the week.
The dollar index, which tracks the greenback against six major currencies, held at 108.53 during early trade on Thursday, near the two-year high recorded earlier in the week. The index climbed 7% throughout 2024.
“The U.S. dollar is likely to remain in pole position this year, given its still-high yield, U.S. exceptionalism, and its safe-haven appeal during uncertain times,” noted Charu Chanana, Chief Investment Strategist at Saxo.
External Pressures Bolster Dollar Demand
A weaker global growth outlook, compounded by geopolitical tensions in the Middle East and the ongoing Russia-Ukraine conflict, has further reinforced the dollar’s appeal as a safe-haven asset.
The euro remained steady at $1.0353 after a 6% decline in 2024. Traders are anticipating more aggressive interest rate cuts from the European Central Bank (ECB) in 2025. Market forecasts suggest 113 basis points of ECB rate cuts compared to the U.S. Federal Reserve’s expected 42 basis points of easing.
Sterling was last seen at $1.2519, ending 2024 with a modest 1.7% decline. Despite the dip, it emerged as the best-performing G10 currency against the dollar, buoyed by the British economy’s resilience against earlier predictions.
Antipodean Currencies Struggle
The Australian and New Zealand dollars began the year with minor gains but remained near their recent two-year lows. The Australian dollar rose 0.1% to $0.6199 after a 9.2% drop in 2024—its weakest annual performance since 2018.
The New Zealand dollar, which declined 11.4% last year—its steepest drop since 2015—was up 0.27% on Thursday at $0.5603.
As global markets adjust to divergent economic outlooks and policy shifts, the U.S. dollar remains positioned as a dominant force in the currency landscape, underscoring its resilience and attractiveness to investors.
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