Dollar Strengthens Before Holidays as Market Focuses on Rate Policies and Trump’s Economic Plan
On Tuesday (December 24), the dollar continued its upward trend in light holiday trading, gaining 0.14% to close at 108.24, marking its fifth rise in six days. Meanwhile, the euro fell 0.15% to $1.0389. The pound edged down 0.06% to $1.2527, while the dollar rose 0.1% against the yen, closing at 157.34, nearing levels that could prompt intervention by the Bank of Japan.
Reasons for Dollar Rise: Divergence between the Fed and Global Central Banks
The dollar has been strong recently, having risen over 7% since the end of September. This surge is partly due to market optimism about President-elect Trump’s policies that might boost U.S. economic growth, as well as rising inflation countering the Fed's rate cut trajectory. Compared to other major central banks, the Fed's slower pace of rate cuts has further widened interest rate differentials, driving the dollar's strength.
Last week, the Federal Reserve announced a rate cut path lower than market expectations, with plans for only two cuts of 25 basis points each in 2025. This cautious approach has once again bolstered U.S. bond yields, with the 10-year yield rising to 4.629% on Tuesday, a seven-month high. FX Street senior analyst Joseph Trevisani noted, "The most important factor in the forex market is the interest rate structures between countries. The Fed’s steady strategy maintains market confidence in the dollar."
Global Market: Euro, Pound, and Yen under Pressure
On Tuesday, the euro fell to $1.0389, and the pound also dipped slightly to $1.2527, mainly due to the dollar's strength and scarce market liquidity. The dollar rose to near 157.34 against the yen, with potential intervention by the Bank of Japan remaining a key market focus. Last week's minutes from the Bank of Japan's meeting showed that if the economy meets expectations, policymakers plan to continue raising rates, albeit cautiously regarding U.S. policy uncertainties.
Trump Policy Expectations Impact Market Sentiment
Expectations for Trump's policies have provided additional support for the dollar. Investors broadly believe that his tariffs, lower tax rates, and immigration restrictions could have significant impacts on the U.S. economy, though the specific direction remains uncertain. As Trump plans to return to the White House, markets are reevaluating the potential economic impact of these policies.
Future Outlook: Interest Rate Policies Remain Dominant in Forex Market
As the year-end approaches, market trading volume is expected to decrease further, with analysts predicting that rate policies will continue to dominate the forex market until the January 10 U.S. employment report is released. Investors need to closely monitor the moves of the Fed and other major central banks, as well as the potential market impacts of Trump’s policies.
Against a backdrop of global rate divergence and economic policy adjustments, the dollar's post-holiday performance could serve as a barometer for the forex market in the new year.
