Last Friday (December 22), the US dollar index experienced significant volatility, hitting a high of 108.54 during the session before retreating to 107.64, down 0.72% for the day, as inflation data eased market concerns. Despite this, the dollar recorded its third consecutive weekly gain due to the Federal Reserve reiterating inflation risks following a hawkish rate cut.
Inflation Easing Boosts Market Sentiment
Data released by the US Department of Commerce showed that the Federal Reserve's preferred inflation measure—the Personal Consumption Expenditures (PCE) Price Index—rose by 0.1% in November, down from 0.2% in October. Year-on-year growth slightly increased from 2.3% in October to 2.4%. Despite the slight rise, the data indicates that inflation is generally slowing. This preferred metric by the Federal Reserve suggests inflation levels are not yet at alarming levels.
ForexLive Chief Currency Analyst Adam Button commented, "Inflation data was milder than expected, and although the Fed reiterated its determination to combat inflation at the meeting, the market subsequently saw a real trend of easing inflation."
Fed's Hawkish Rate Cut Adjusts Policy Path
The Federal Reserve announced a 25 basis points rate cut to 4.5% last Thursday, marking the third rate cut of the year. However, officials stated in their policy statement that rate cuts in 2025 will be fewer, with only two expected. The Fed emphasized that although recent inflation has decreased, it remains above the target range, indicating inflation's stubbornness may limit the space for future monetary policy.
This hawkish stance briefly strengthened the dollar, with the US 10-year Treasury yield reaching a six-and-a-half-month high after the decision. However, by Friday, the yield fell by 6.2 basis points to 4.51%.
Mixed Movements in Non-US Currencies
After the dollar's retreat, non-US currencies generally rebounded. The euro rose by 0.76% to 1.04418 USD at the close, recovering from a one-month low of 1.03435 USD during the session. Earlier, pressure on the euro emerged from Trump's remarks pushing the EU to increase its purchase of US oil and gas to offset the trade deficit, or face tariff risks.
The British pound fared poorly after the Bank of England's decision to keep rates unchanged, hitting a one-month low of 1.2475 USD during the session, but rebounded to 1.25990 USD at the close, up 0.77% for the day. However, the pound recorded its third consecutive weekly decline.
The USD/JPY fell to a five-month low of 157.93 yen as the Bank of Japan maintained its rate policy. The USD/CHF fell by 0.79% to 0.892 CHF, also recording a weekly decline.
Market Outlook
Looking ahead, the US dollar's trajectory will continue to be influenced by the Federal Reserve's policy stance and economic data. While the Fed's hawkish rate cut has adjusted the policy path for 2025, market confidence in easing inflation has improved. Meanwhile, Trump's energy and trade policy initiatives could further impact the euro and the global currency landscape, prompting investors to closely monitor related developments.
