Business
Dollar holds firm as US rates outlook still dominates
The dollar defended its recent dominance on Tuesday in a holiday-lined week, as investors considered the prospect of higher-for-longer US interest rates, leaving other major currencies struggling near milestone lows.
The US dollar has leaped ahead over the past three months against a basket of currencies, fuelled by diverging central bank outlooks.
After its policy meeting on Wednesday, the U.S. Federal Reserve now looks set to hold rates higher for longer than markets had expected, elevating U.S. Treasury yields and sending the currency 1.2% up to two-year peaks.
Trading volumes are likely to thin out this week as the year-end approaches and major economic data releases are scarce, meaning the rates theme is likely to remain the main driver of moves in the foreign exchange market.
The dollar index held up firm on the day, 0.1% higher at 108.2, still hovering close to the two-year high of 108.54 it reached on Friday.
Other currencies took a breather on Tuesday, but the impact of the dollar’s recent rally was still felt across the board.
The euro was last bought at $1.0393, slightly lower on the day and not far from November’s two-year low, while sterling hovered around a one-month low at $1.2532.
Elsewhere, the yen was pinned near a five-month low and last stood at 157.04 per dollar, having already fallen close to 5% this month into territory that is keeping traders on alert for any intervention from Japanese authorities.
The Bank of Japan (BOJ) last week kept rates on hold and stayed vague on when it could next raise them. The central bank communication stood in stark contrast to the Federal Reserve’s hawkish tone a day earlier, when it projected a measured pace of rate cuts in 2025, sending the yen sliding.
“The shifts in Fed-BOJ policy divergence are now more likely to weaken the JPY,” said Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho Bank.
“JPY carry trades could, in defiance of a step-up in volatility or uncertainty, remain in play as two critical factors – supported ‘carry returns’ and mitigated capital risks of JPY squeeze – conspire favourably.”
Down Under, the Australian dollar eased 0.19% to $0.6237, while the New Zealand dollar dipped 0.16% to $0.5641.
The Reserve Bank of Australia (RBA) released the minutes of its December policy meeting on Tuesday, which signalled the central bank was closer to cutting interest rates, but needed the flow of economic news to support its confidence that inflation was slowing.
DOLLAR AHEAD
The greenback looked set to end the year more than 6% higher, after falling back last year.
While a benign U.S. inflation reading on Friday eased concerns about the pace of Fed cuts next year, markets are still pricing in just about 35 basis points worth of easing for 2025, in turn underpinning the dollar.
“Our base case is that the dollar will make some further headway next year as the U.S. continues to outperform, the interest rate gap between the U.S. and other G10 economies widens a little further, and the Trump administration brings in higher U.S. tariffs,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.
Ahead of U.S. President-elect Donald Trump’s return to the White House in January, global central banks have urged caution over their rate paths due to uncertainty on how Trump’s planned tariffs, lower taxes and immigration curbs might affect policy.
Goldman Sachs said it was uncertain how tariffs could affect future Fed policy, adding that the inflation impact of price increases should fade after a year.
“The 2018-2019 trade war tightened financial conditions by enough to prompt an easing in Fed policy,” Goldman Sachs added.
“Much about the current cycle is different, but the 2018-2019 experience shows that the monetary policy risks from tariffs are at a minimum two-sided.”
The dollar steadied against major peers on Thursday, continuing its near paralysis of the past two days before more concrete announcements on tariffs from U.S. President Donald Trump.
A spate of central bank policy decisions are also due over the next week, with the Bank of Japan widely expected to raise interest rates at the end of a two-day meeting on Friday.
Rate decisions from the U.S. Federal Reserve and European Central Bank are scheduled for Wednesday and Thursday of next week, respectively.
The dollar index – which measures the currency versus six top rivals, including the euro and yen – was flat at 108.25, following two days of gains of around 0.1%.
On Monday, it tumbled 1.2%, its steepest one-day slide since November 2023, as Trump’s first day in office brought a barrage of executive orders, but none on tariffs.
So far this week, Trump has mooted levies of around 25% on Canada and Mexico and 10% on China from Feb. 1. He also promised duties on European imports, without giving details.
“President Trump has so far taken a less hostile-than-expected approach to China,” amid overall “softer-than-expected policies and tone on tariffs”, said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
At the same time, “we are cautious (that) risk sentiment remains fragile and can quickly turn sour if President Trump strikes a more aggressive tone.”
The Chinese yuan was little changed at 7.2812 per dollar in offshore trading .
Wall Street’s main indexes rose Wednesday, with the S&P 500 hitting an intraday record high thanks to strong Netflix earnings and a rally in tech shares.
Japan’s yen edged up about 0.1% to 156.40 with markets pricing 95% odds of a quarter-point hike on Friday.
The euro was flat at $1.0411. The ECB is widely expected to cut rates by a quarter point next week.
The Canadian dollar held steady at C$1.4386 against the greenback. The Bank of Canada is seen as likely to reduce rates by a quarter point next Wednesday.
The Mexican peso was little changed at 20.47 versus the U.S. currency.
Oil prices dipped in early trade on Thursday, extending losses amid uncertainty over how proposed tariffs by U.S. President Donald Trump on several countries would impact global economic growth and energy demand.
Brent crude futures fell 23 cents, or 0.3%, to $78.79 a barrel at 0135 GMT, while U.S. West Texas Intermediate crude (WTI) eased 18 cents, or 0.2%, to $75.26.
In its previous session, Brent futures settled at $79.00 in a fifth straight day of losses. WTI futures settled at $75.44 in a fourth consecutive day of declines.
Trump has said he would add new tariffs to his sanctions threat against Russia if the country does not make a deal to end its war in Ukraine. He added these could be applied to “other participating countries” as well.
He also vowed to hit the European Union with tariffs, impose 25% tariffs against Canada and Mexico, and said his administration was discussing a 10% punitive duty on China because fentanyl is being sent to the U.S. from there.
Meanwhile, estimates from an extended Reuters poll showed that on average U.S. crude oil stockpiles were expected to have fallen by 1.6 million barrels in the week to Jan. 17.
Gasoline stockpiles were estimated to have risen by 2.3 million barrels last week, and distillate inventories were likely to have gained 300,000 barrels.
The poll was conducted ahead of the American Petroleum Institute industry group’s report and another from the Energy Information Administration at 12:00 p.m. ET (1700 GMT) on Thursday.
European wind shares fell on Tuesday (January 21).
The reports were delayed by a day due to the Martin Luther King Jr. Day federal holiday on Monday.
Pakistan and Saudi Arabia have reaffirmed their commitment to further strengthening the bilateral economic ties for shared prosperity.
The commitment was expressed when Finance Minister Muhammad Aurangzeb met with his Saudi counterpart Mohammad bin Abdullah Al-Jadaan on the sidelines of World Economic Forum Annual Meeting in Davos.
Muhammad Aurangzeb highlighted the key reform measures undertaken by the Government to promote economic stability and sustainable growth.
He briefed him on structural reforms, fiscal discipline and regulatory improvements that have contributed to an improved investment climate in Pakistan.
Earlier, Aurangzeb met Anna Bjerde, Managing Director of Operations at the World Bank.
They discussed cooperation between Pakistan and the World Bank, with a particular focus on Pakistan’s macroeconomic stability.
The finance minister emphasized the government’s strong partnership with the Bank and expressed hope that the World Bank would continue playing a key role in the country’s socio-economic development.
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