Written by Uncle Banerjee
SINGAPORE (Reuters) – The dollar held firm in the final trading day of the year, with investors bracing for a narrower U.S. interest rate cut and policies from the incoming Trump administration, with investors on track for big gains in 2024 against most currencies. I was ready.
The dollar's strength, supported by rising U.S. bond yields, is pushing the yen toward its lowest levels since Japan's last intervention in July. The dollar was at 157.02 on Tuesday, with the dollar expected to fall by 10% in 2024, marking the fourth straight year of declines against the dollar.
Japanese markets are closed for the remainder of this week, and volume is likely to be very thin on Wednesday as most markets will be closed for the New Year's Day holiday.
That puts the dollar index, which measures the U.S. currency and six other major currencies, at 108.06, not far from the two-year high hit earlier this month. The index rose 6.6% in 2024 as traders refrained from betting on deep interest rate cuts next year.
The Fed shocked markets earlier this month by lowering its 2025 interest rate forecast from 100 basis points to 50 basis points, wary of persistently high inflation.
But Goldman Sachs strategists believe inflation is still trending down and expect the Fed to cut interest rates three times next year.
“We view the risks to interest rates from the policies of the second Trump administration to be more two-sided than widely assumed,” they said in a note.
Also pushing the dollar higher are expectations that President-elect Donald Trump's policies of deregulation, tax cuts, higher tariffs and tougher immigration will boost growth and inflation, keeping U.S. yields rising.
Gary Dugan, CEO of the Office of the Global CIO, said: “While the market's initial reaction to Trump's re-election to the White House in November was euphoric, it is now more cautious about the priorities of the incoming administration.'' It seems like they are analyzing it.”
the dollar casts a shadow
Traders are concerned about the wide spread in interest rates between the U.S. and other countries, with the possibility that U.S. interest rates will remain high for an extended period of time hurting most other currencies, especially emerging market currencies.
The euro is expected to fall 5.7% against the dollar this year, with traders expecting the European Central Bank (ECB) to cut interest rates more sharply than the Fed. On Tuesday, the single currency was stable at $1.04025, close to its two-year low of $1.03315 hit in November.
This year has been another tumultuous one, with the yen hitting a multi-decade low in late April and falling again to 161.96 yen to the dollar in early July, prompting intervention from the Japanese government.
