THE US dollar hit a two-year high and was on track to post an annual gain against almost all major currencies on Tuesday (Dec 31) as the prospect that the Federal Reserve will hold interest rates higher than peers led the US currency to dominate rivals.
Traders have adjusted for the US central bank to take a slow and cautious approach to further rate cuts in 2025 as inflation remains above the Fed’s 2 per cent annual target.
Analysts also expect policies to be introduced by president-elect Donald Trump, including business deregulation, tax cuts, tariffs and a clampdown on illegal immigration, to boost growth and add to price pressures in 2025.
That has sent yields on US Treasuries higher and the bolstered demand for the US currency.
“Yields in the US have adjusted higher to price in the potential inflationary impact from the incoming Trump administration’s policy agenda including tariff hikes, tighter immigration policy and maintaining loose fiscal policy,” said Lee Hardman, senior currency analyst at Mitsubishi UFJ Financial Group.
The dollar index was last up 0.4 per cent on the day at 108.49 and earlier reached 108.58, the highest since November 2022. It is headed for an annual gain of 7 per cent.
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Weaker growth outlooks outside of the United States and rising geopolitical tensions in the Middle East, as well as the ongoing Russia/Ukraine war have added to demand for the US currency in 2024.
The greenback has been boosted by “rising growth concerns elsewhere against the background of geopolitical risk,” analysts at Action Economics said in a note.
Trading volumes were thin on Tuesday before the New Year holiday on Wednesday.
The Japanese currency was among the biggest losers of the year and was on pace for its fourth yearly loss against the greenback as it suffers from a wide interest rate differential between Japan and the United States.
Analysts expect the Japanese currency to eventually be supported by further Fed easing and interest rate increases by the Bank of Japan. Until then traders are on watch for intervention by Japanese authorities, after they stepped in to support the currency several times in 2024.
The greenback was last up 0.3 per cent at 157.28 yen and on track for a 11.5 per cent yearly gain.
The euro fell 0.5 per cent to US$1.0353 and is on pace for a 6.2 per cent yearly decline, with traders expecting the European Central Bank to be sharper with its cuts than the Fed.
Sterling weakened 0.3 per cent to US$1.2508 and was on course for a 1.6 per cent fall in 2024, the strongest performance of any major currency against the dollar last year.
The Australian and New Zealand dollars both fell to two-year lows on Tuesday. The Aussie was set for a drop of around 9.2 per cent in 2024, its weakest yearly performance since 2018. The kiwi was poised for a 11.4 per cent decline, its softest performance since 2015.
In cryptocurrencies, Bitcoin gained 2.1 per cent to US$93,824. It reached a record high of US$108,379.28 on Dec 17 and is set for a 121 per cent gain in 2024. REUTERS
