U.S. Dollar Poised for Annual Gains as Markets Eye High Fed Rates

U.S. Dollar emerged as a standout performer for 2024, heading for an impressive 6.6% annual gain. Meanwhile, the Japanese yen faced its fourth consecutive year of losses as traders braced for robust U.S. growth and a cautious Federal Reserve approach to rate cuts in 2025.

The dollar index, which measures the U.S. currency against major peers, climbed 0.08% to 108.06, reflecting a 2.2% monthly rise. It also posted a 5.5% monthly gain against the yen and an 11.8% annual surge against the Japanese currency. Additionally, the euro struggled near two-year lows, trading at $1.042 after hitting $1.04 earlier this month.

U.S. Dollar Strength Amid Policy Shifts

The Federal Reserve’s caution on rate cuts has supported the ascent of U.S. Dollar. Fed Chair Jerome Powell stated earlier in December that policymakers would remain vigilant about further rate reductions, bolstered by a strong U.S. economy.

Conversely, the Bank of Japan (BoJ) opted to maintain its loose monetary policy, with Governor Kazuo Ueda emphasizing a wait-and-see approach amid uncertainties over the impact of incoming U.S. policies under President-elect Donald Trump. This divergence has pressured the yen, which hovered around 157.75 per dollar on Friday.

The European Central Bank (ECB) is also expected to deliver additional rate cuts in 2025, with traders pricing in a 100-basis-point reduction to 2% as the eurozone economy slows. This has further weakened the euro, which remains under significant pressure.

Traders Monitor Global Developments

While the U.S. dollar’s dominance is evident, global markets are adapting to mixed signals. U.S. equities continue to outperform, aided by weaker currencies in Asia and Europe that support exporters. However, central banks worldwide remain cautious about U.S. tariff impacts on global trade.

With traders pricing in a modest 37 basis points of U.S. rate cuts in 2025 and no significant reduction expected before mid-year, the U.S. dollar’s strength is set to extend into the new year, reinforcing its position as a safe-haven currency in an uncertain economic landscape.

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