The US dollar retreated on Friday, but remained on track for a strong weekly performance. This performance is attributed to expectations that the US economy will continue to outperform, which means fewer Fed rate cuts this year. These dynamics suggest that the dollar will continue to be strong in the global market.
US Dollar Performance Analysis
At 04:20 ET, the US dollar index, which measures the value of the greenback against six other major currencies, was trading down 0.3% at 108.900. It had reached its highest level in more than two years in the previous session, but the decline did not prevent it from continuing to post weekly gains. This is expected to be the best performance for the dollar in more than a month.
The weekly gains for this currency signal the continued tightening of the Federal Reserve’s monetary policy and the resilience of the US economy. Manufacturing activity data for December was stronger than expected, giving the dollar additional momentum, highlighting the gap between the US economy and some other economies.
US Manufacturing Activity Index
US manufacturing activity data for December, released by S&P Global, showed positive results, paving the way for more optimism about the US economy. Although the manufacturing index fell to 48.2 last month, this figure is still above the level that indicates a significant decline in economic activity. A decline in manufacturing activity below 50 points signals slowing activity, but analysts still consider the reading an economic expansion.
Despite the manufacturing slowdown, markets are closely watching the upcoming monthly jobs report, expecting it to provide strong signals about the future outlook for US monetary policy. Expectations are for no major change in Fed policy in January, but surprises in the data could reshape monetary calculations.
Interest and Dollar Expectations
Markets are expected to hold rates steady in January, but there is speculation that the Federal Reserve may keep its policy high for longer than expected. Analysts at ING suggest that markets may now be pricing in no change in monetary policy until next month, which should continue to support the dollar. Upcoming economic data, including the non-farm payrolls report, is expected to be key in shaping the outlook.
Euro dips despite tentative rebound
On the other side of the Atlantic, EUR/USD rose 0.2% to 1.0282 after a sharp 1% decline in the previous session. Despite the rebound, the euro was still on track for a significant weekly decline of 1.5%, its worst weekly performance since November. This decline stems from the drop in industrial activity in the eurozone, with recent data showing that manufacturing activity fell at a faster pace at the end of 2024.
Many traders are pointing to further interest rate cuts from the European Central Bank in 2025, which is putting pressure on the euro. In this context, investors are betting that accommodative policies will remain in place in the eurozone, which enhances the market’s incentives to seek better returns outside the single currency area.
The performance of the British pound and European currencies
The pound (GBP/USD) recorded a rise of 0.2% to reach 1.2406 after witnessing a decline of more than 1% in the previous session. Despite this rise, the pound is heading towards a loss of about 1.4% during the current week. This decline is due to the continued pressure on the British economy amid the rise in consumer prices that exceeded expectations in the recent period.
As for the British Central Bank, it decided to keep interest rates unchanged last month after economic data showed a significant increase in inflation levels.
Chinese Yuan: Falls after interest rate cut decision
In Asia, the Chinese Yuan (USD/CNY) rose 0.7% to 7.3523, its highest level since September 2023. The rise came after reports that the People’s Bank of China will cut interest rates in 2025, in an attempt to boost the Chinese economy. Reports indicate that the Chinese central bank is considering more conventional monetary policies in the near future, after several previous measures failed to stimulate the economy as expected. Despite the rise, the yuan remains under pressure due to the slowdown in China’s economic growth, which reflects uncertainty in the Chinese economy, which faces many challenges.
Japanese Yen Performance
As for the Japanese Yen (USD/JPY), it declined by 0.2% to 157.18, after hitting a more than five-month high in late December. The yen continues to face pressure despite the Bank of Japan’s cautious outlook for 2025. Analysts see the yen’s future outlook as largely tied to the monetary policies that the Bank of Japan will continue to pursue, with traders expecting the yen to remain under pressure, especially in light of the Bank of Japan’s ultra-easy monetary policy.
Global Currency Outlook
Global currency markets have been volatile lately. The US dollar retreated slightly on Friday, but is still on track for a solid weekly gain. The future performance of global currencies largely depends on key economic decisions in the US, Europe and Asia. Many analysts expect the dollar to continue to outperform many other currencies, especially if the Federal Reserve continues to pursue a tight monetary policy in 2024. Meanwhile, the euro and the pound remain under pressure due to the implications of central bank monetary policies.
On the other hand, the Chinese yuan and the Japanese yen point to the challenges facing their economies, which enhances the chances of relative strength for the dollar.
