On December 19, the US dollar strengthened against the euro, the pound, and the yen, while weakening against the Swiss franc, the Canadian dollar, and the Swedish krona. The dollar index showed a volatile trend throughout the day, briefly consolidating in weakness but rising 0.36% by the close to 108.409. The continuous rise in US long-term treasury yields provided strong support for the dollar, with the 10-year yield rising over 5 basis points during the day, peaking at 5.98%.
The Dollar Benefits from the Fed's Hawkish Policy
Forex market analysts pointed out that the Fed's recent announcement of a hawkish rate cut policy has adjusted market expectations, boosting the dollar's potential for appreciation. A market analyst at Monex Europe stated that this Fed policy decision may signal the start of a prolonged halt in rate cuts, and in the coming months, the dollar may continue to gain support due to this expectation.
UBS foreign exchange strategists believe that the current market focus is on the monetary policies of major central banks, with the Fed's hawkish rate cut and the Bank of Japan's dovish stance being key drivers of the dollar's performance.
The Bank of Japan Maintains Dovish Policy
At its monetary policy meeting on the 19th, the Bank of Japan decided to keep its policy rate unchanged, in line with market expectations. BOJ Governor Kazuo Ueda stated at a press conference that there remains significant uncertainty regarding the economic and inflation outlook, and the central bank will continue to monitor global economic trends, particularly the impact of Trump’s economic policies on Japan. He also emphasized that the BOJ needs to wait for next spring's wage negotiations to assess the sustainability of wage growth.
Although the market had previously expected the BOJ to signal a hawkish shift, Ueda's remarks were interpreted as maintaining a dovish stance, which put pressure on the yen. On that day, the dollar rose to 157.43 against the yen, up from the previous day's 154.66.
Other Central Bank Policies Create Exchange Rate Divergence
The Bank of England also announced on the 19th that it would keep interest rates unchanged, consistent with market expectations. This contrasts sharply with the 25 basis point rate cut in its previous meeting. The BOE's decision failed to support the pound, with the dollar rising to 1.2505 against the pound, down from a previous 1.2593.
In Europe, the euro also fell against the dollar, down to 1.0362 from the previous day's 1.0376.
Meanwhile, the dollar weakened against some currencies, such as the Swiss franc at 0.8983 (from 0.9003 the previous day), the Canadian dollar at 1.4388 (from 1.4417 the previous day), and the Swedish krona at 11.0322 (from 11.1102 the previous day). This divergence reflects the market's different reactions to various central banks' policies.
Future Outlook
Analysts expect that the dollar may continue to be supported in the coming months, particularly if the Fed maintains its hawkish stance. However, as the policy divergence among major global central banks becomes more apparent, uncertainty in the foreign exchange market will remain high. Investors need to closely monitor further signals on the Fed's policy path and other central banks' latest assessments of economic growth and inflation prospects.
