On Thursday, the US dollar surged on the first trading day of 2025, reaching its highest level since 2023. This rise continued the strong performance from last year, primarily supported by robust US economic growth expectations and relatively high interest rate policies. The dollar index closed up 0.77% at 109.38 points, the highest level in nearly two years.
Expectations of Federal Reserve policy provided strong support for the dollar. The Fed has stated clearly that it will remain cautious regarding rate cuts as inflation remains above the 2% target level and the US economy continues to perform well. Meanwhile, policies from US President-elect Trump could further drive economic growth and increase inflationary pressure.
Economic data also supported the dollar. The latest figures showed a strong performance in the US job market, with jobless claims falling to an eight-month low last week, indicating a decrease in layoff activities at the end of 2024. This further strengthened market confidence in the US economy.
In contrast, the euro and the pound were under pressure as the dollar strengthened. The euro plunged quickly after breaking the critical support level of 1.03 USD, closing down 1.01% at 1.025 USD, the lowest since November 2022. The market widely expects the European Central Bank to significantly cut interest rates in 2025, possibly implementing at least four 25 basis point reductions, further pressuring the euro.
The pound also performed poorly, dropping 1.19% to 1.2368 USD, the lowest level since April last year. After breaking the support level near 1.2475 USD, the pound showed an accelerating downward trend. Despite outperforming most major currencies against the dollar last year, concerns about the UK economy and interest rate outlook are currently weighing on its performance.
Additionally, the dollar-yen exchange rate rose 0.47% to 157.61 yen, nearing a five-month high of 158.09 yen reached last December. This could put more pressure on the Bank of Japan, although the market expects it to take rate hike measures early this year, these are unlikely to be implemented immediately in the short term.
Overall, the dollar showcased strong resilience at the start of 2025, while major competing currencies faced multiple downward pressures. The divergence in market expectations for economic and policy direction has become a key driver of exchange rate volatility.
