Dollar strength is driven by strong U.S. data, fewer Fed rate cuts, anticipated Trump policies and cautious market sentiment favoring safe havens.
US dollar strength influenced by economic data and political expectations
The US Dollar (USD) is showing widespread strength against major currencies such as the Euro (EUR), British Pound (GBP) and New Zealand Dollar (NZD). This surge is fueled by several converging factors. First, positive U.S. economic data, particularly initial jobless claims for the week ending December 28, which came in at 211,000 (below the previous week’s 220,000 and 2025’s 3.9 predicted by the market), signal a robust US labor market and support the dollar. Second, expectations regarding Federal Reserve (Fed) interest rate cuts are evolving. While declines are expected in 2009, the market is now pricing in fewer declines than previously expected, with the Fed’s dot chart showing a year-end federal funds rate of 20%, implying only two declines from to previous forecasts of four.
This relatively aggressive stance compared to other central banks provides additional support for the dollar. Third, planned policies of President-elect Trump’s administration, such as tightening immigration and raising import tariffs, are fueling beliefs in a potential boost to U.S. growth and higher productivity. inflation, further strengthening the dollar. Finally, the December ISM manufacturing PMI, while still indicating a contraction at 49.3, slightly exceeded expectations of 48.4, and the prices paid index component fell from 50.3 to 52.5, demonstrating increasing pressures on prices and providing additional support to the dollar.
Diverging Monetary Policy Outlooks Between the United States and Other Regions
One crucial theme is the growing divergence in monetary policy expectations between the United States and other major economies, including the Eurozone and potentially China. While the Fed is expected to make rate cuts at a measured pace, the European Central Bank (ECB) is expected to continue its cycle of monetary easing. This contrast in outlook creates downward pressure on the EUR/USD exchange rate, with market players even counting on four rate cuts from the ECB for the year. Simultaneously, the People’s Bank of China (PBoC) signaled further potential easing measures, including a reduction in reserve requirement ratios (RRR) and interest rates. This anticipation of Chinese stimulus measures has a positive effect on currencies like the NZD, given New Zealand’s significant trade relationship with China.
Market sentiment and risk aversion
General market sentiment and risk appetite also play an important role in currency movements. The “cautious market mood” seen at the start of 2025 has benefited the dollar, as it is often seen as a safe-haven currency in times of uncertainty and investor risk aversion. Additionally, current geopolitical tensions, including those related to Iran’s nuclear program and the Russia-Ukraine conflict, are contributing to the demand for safe-haven assets, which in turn supports assets like gold. These three themes are closely related and collectively influence the dynamics observed in the foreign exchange markets.
Main important economic events for next week:
- 06/01/2025 01:45 Caixin Services PMI (HIGH, CNY): This Purchasing Managers’ Index provides essential insight into the health of China’s services sector, an important driver of its economy. An index above 50 indicates expansion, while an index below 50 indicates contraction. It can have a significant impact on the CNY and global market sentiment.
- 06/01/2025 1:00 p.m. Consumer price index (MoM/YoY) (HIGH, EUR): These figures measure the evolution of the prices of goods and services in the euro zone. They are essential to the monetary policy decisions of the European Central Bank. High inflation can lead to interest rate increases, which impacts the euro.
- 01/06/2025 1:00 p.m. Harmonized Consumer Price Index (YoY) (HIGH, EUR): This is another key inflation indicator for the Eurozone, harmonized across member states for better comparison. It is also closely monitored by the ECB.
- 01/07/2025 07:30 Consumer price index (YoY) (HIGH, CHF): This indicator measures inflation in Switzerland. It is important for understanding the policy of the Swiss National Bank and its effects on the CHF.
- 01/07/2025 10:00 Basic harmonized consumer price index (Monthly/Annual) (HIGH, EUR): This excludes volatile items like food and energy, providing a clearer picture of underlying inflation trends in the euro zone, which is closely monitored by the ECB.
- 01/07/2025 10:00 Harmonized Consumer Price Index (Monthly/Annual) (HIGH, EUR): As mentioned previously, the harmonized consumer price index is a key indicator of inflation in the Eurozone and influences ECB policy.
- 01/07/2025 15:00 ISM Services PMI (YEAR, USD) : This index reflects the performance of the services sector in the United States, which represents a significant part of the American economy. It is a key indicator of economic health and can significantly influence the dollar.
- 01/08/2025 00:30 Monthly Consumer Price Index (YoY) (HIGH, AUD): This indicator measures inflation in Australia and is crucial to the Reserve Bank of Australia’s monetary policy decisions, impacting the AUD.
- 01/08/2025 13:15 Variation of the employment ADP (HIGH, USD): This report provides an initial estimate of U.S. private sector employment growth ahead of the official release of the Nonfarm Payrolls Report. It can have a significant impact on market expectations and dollar movements.
- 01/10/2025 13:30 Non-agricultural payrolls (HIGH, USD) : It is one of the most closely watched economic indicators in the world. It measures changes in the number of people employed in the United States, excluding farm workers, government employees, and private household workers. It has a major impact on the dollar, interest rate expectations and market sentiment.
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