The dollar was on track for its best weekly performance in more than a month on Friday, supported by expectations of an interest rate cut from the Federal Reserve this year and views that the U.S. economy will continue to outperform the rest of its peers globally.
The greenback started the new year on a strong note, hitting a more than two-year high of 109.54 against a basket of currencies on Thursday, as it extended a stellar rally from last year.
This increase is explained by the Fed's desire to be more firm and by the resistance of the American economy.
“It appears that dollar strength is here to stay in early 2025, given that the story of American exceptionalism is here to stay, and it is still accompanied by high American yields,” said Charu Chanana, chief investment strategist at Saxo.
“Add to that the uncertainty related to the policies of the incoming (Donald) Trump administration, and you also get the security aspect of the dollar which looks attractive.”
As US President-elect Trump's inauguration on January 20 approached, markets cautiously welcomed his impending inauguration due to uncertainty over his plans for high tariffs on imports, reductions in taxes and immigration restrictions.
The greenback therefore benefited from additional support as a safe haven.
The Dollar Index settled at 109.18 and was on track for a weekly gain of 1.1%, the biggest since November.
The euro was one of the biggest losers against a towering dollar, falling 0.86% in the previous session to a more than two-year low of $1.022475.
“As for the Eurozone, there could be the direct impact of higher trade tariffs on the Eurozone or (its) economies, but perhaps more relevantly, the higher tariffs on China, which will also be a kind of weakness in the euro zone,” said Kyle Rodda, senior financial markets analyst at Capital.com.
The common currency last bought $1.0272 and was heading for a 1.6% weekly decline, the worst since November.
Likewise, the British pound rose 0.04% to $1.2385, after sliding 1.16% on Thursday. It was on track to lose around 1.6% for the week.
The prospect of widening rate differentials between the United States and the rest of the world has also helped the dollar strengthen its dominance over other currencies.
While traders now only expect about 44 basis points of rate cuts from the Fed this year, they see more than 100 basis points of easing from the European Central Bank and about 60 basis points of basis from the Bank of England.
Elsewhere, the yen rose 0.16% to 157.25 per dollar, but is not far from a more than five-month low of 158.09 per dollar reached in December.
The Japanese currency has been a victim of the wide gap between US and Japanese interest rates for over two years now, and the Bank of Japan's caution towards further interest rate increases only worsens the situation of the yen.
The yen has fallen more than 10% in 2024, extending its losses for the fourth consecutive year.
In Australia, the Australian dollar rose 0.2% to $0.6216, but remained near its lowest level in more than two years, and was on track to lose 0.2% over the week.
The New Zealand dollar rose 0.17% to $0.56065, but was also heading for a weekly loss of 0.66%.
