By Ankur Banerjee
SINGAPORE (Reuters) – The dollar held firm on the final trading day of the year, set to post strong gains in 2024 against most currencies, as investors braced for fewer U.S. rate cuts and policy of the next Trump administration.
The dollar’s rise, fueled by rising Treasury yields, has pushed the yen to its lowest levels since July, when Japanese authorities last intervened. On Tuesday, it was at 157.02 per dollar, on track for a 10% drop in 2024, its fourth consecutive year of decline against the dollar.
Japanese markets are closed for the rest of the week, and with most markets closed on Wednesday for the New Year’s Day holiday, volumes are likely to be very thin.
That has left the dollar index, which measures the U.S. currency against six other major units, at 108.06, not far from the two-year high it hit this month. The index is up 6.6% in 2024, as traders reduced their bets on deep rate cuts next year.
The Federal Reserve surprised markets earlier this month by cutting its 2025 interest rate forecast to 50 basis points, from 100 basis points, fearful of persistently high inflation.
However, Goldman Sachs strategists expect three rate cuts from the Federal Reserve next year, confident that inflation will continue to trend downward.
“We view the risks to interest rates from the policies of the second Trump administration as more bilateral than generally assumed,” they said in a note.
The dollar has also been buoyed by expectations that President-elect Donald Trump’s policies of looser regulation, tax cuts, tariff increases and stricter immigration will be pro-growth and inflationary and keep U.S. yields elevated.
“While markets’ initial reaction to Trump’s re-election to the White House in November was euphoric, they now appear to be taking a more careful look at the incoming administration’s priorities,” said Gary Dugan, chief executive of the Global CIO Office.
THE DOLLAR PROJECTS SHADOW
The prospect of U.S. rates staying high for longer has weighed on most other currencies, especially those in emerging markets, as traders worry about the stark difference in interest rates between the U.S. and other countries. economies.
The euro is expected to fall 5.7% against the dollar this year, and traders expect the European Central Bank to deliver sharper cuts than the Federal Reserve. On Tuesday, the single currency was steady at $1.04025, but holding close to the two-year low of $1.03315 it hit in November.
In what turned out to be another turbulent year, the yen broke multi-decade lows in late April and again in early July, falling to 161.96 per dollar and prompting bouts of intervention by Tokyo.