The US dollar experienced a slight decline on Friday but remained positioned for a strong weekly performance, driven by expectations of robust US economic resilience and fewer Federal Reserve rate cuts in 2025.
Dollar Index Retreats but Maintains Strength, the Dollar Index—which measures the greenback against a basket of six major currencies—slipped 0.3% to 108.900. This followed a retreat from a more than two-year high achieved in the prior session.
Despite Friday’s dip, the index is poised for weekly gains of approximately 1%, marking its best performance in over a month. This strength reflects market sentiment favoring a more hawkish Federal Reserve and a resilient US economy.
Key Economic Indicators Boost Dollar Sentiment On Thursday, S&P Global’s data revealed stronger-than-expected US manufacturing activity for December, setting the stage for the Institute for Supply Management (ISM)’s forthcoming report, a more widely-followed indicator.
The ISM’s manufacturing activity index is projected to cool slightly to 48.2 for December, down from November’s five-month high of 48.4. While this marks the eighth consecutive month below the critical 50-point threshold, the index remains above the 42.5 level that indicates overall economic expansion, according to the ISM.
Looking ahead, traders are turning their attention to next week’s crucial monthly jobs report and the Federal Reserve’s upcoming policy meeting.
“Markets are fully expecting a hold in January,” noted analysts at ING. “If indeed the dot plot serves as a benchmark for rate expectations over the next three months, the bar for a data surprise to challenge the dollar’s significant rate advantage is set higher.”
Euro Rebounds Slightly but Faces Weekly Losses In Europe, the EUR/USD pair edged up 0.2% to 1.0282, recovering modestly after plunging nearly 1% in the previous session to a two-year low.
The euro found some support as German unemployment figures for December rose less than anticipated, according to data released on Friday. However, the currency is still on track for a weekly decline of around 1.5%, its steepest since November. This drop followed data indicating an accelerated contraction in eurozone manufacturing activity at the close of 2024.
Markets continue to anticipate further interest rate cuts from the European Central Bank (ECB) in 2025, with at least 100 basis points of easing already priced in.
Similarly, GBP/USD rose 0.2% to 1.2406 after sliding over 1% on Thursday. However, the pound is still heading for a weekly loss of approximately 1.4%. The Bank of England recently held interest rates steady, with inflation surpassing target levels. Traders are now factoring in roughly 60 basis points of rate cuts by the Bank of England in 2025.
Yuan Declines Amid Reports of Further PBOC Rate Cuts In Asia, USD/CNY climbed 0.7% to 7.3523, hitting its highest level since September 2023. The Financial Times reported that the People’s Bank of China (PBOC) plans to implement further rate cuts in 2025. This move aligns with the central bank’s shift toward a more conventional monetary policy framework, anchored by a singular benchmark interest rate.
These monetary policy adjustments follow a series of liquidity measures that have largely failed to stimulate China’s economy over the past two years.
The US dollar continues to assert dominance in global markets, underpinned by economic resilience and hawkish Federal Reserve policies. However, divergent monetary policy paths across regions highlight the complex dynamics influencing major currency movements as 2025 unfolds.
