The U.S. dollar index performed remarkably in 2024, with an annual increase of nearly 7% amid a cumulative 100 basis point rate cut by the Federal Reserve. As we enter 2025, the dollar remains strong, briefly surpassing the 109 threshold in early January and currently hovering around 108, marking a rise of over 2% since December last year.
Analysts point out that the comparative advantage of the U.S. economic and interest rate outlook is the core factor driving the strength of the dollar. Analysts from the Financial Markets Department of China Construction Bank believe that the U.S. labor market remains highly resilient, with initial jobless claims falling to an eight-month low last week, undermining expectations for Fed rate cuts. Meanwhile, the weak economies of non-U.S. regions such as the Eurozone and the UK further support the dollar through the relative advantage of the U.S. fundamentals.
Under pressure from a strong dollar, non-U.S. currencies, especially Asian currencies, face significant depreciation pressure. On Monday, the Bloomberg Asian Currency Index fell to its lowest point since 2006 at 89.0409. The yen fell below the 158 threshold against the dollar during the day, and the Indian rupee's exchange rate neared a historical low at 85.7033. The Indonesian rupiah also repeatedly touched the critical point of 16,000 rupiahs per dollar.
In response to drastic exchange rate fluctuations, governments and central banks in many countries have made intensive statements to intervene in the market. Japanese Finance Minister Shunichi Kato stated this week that appropriate actions would be taken in cases of excessive speculative fluctuations. Last year, the Bank of Japan intervened multiple times when the yen fell below 160 against the dollar, and the current rate level is once again approaching this critical point, fueling speculation about further intervention by the Japanese government.
Indonesia has also taken measures to stabilize the exchange rate. The Bank of Indonesia announced in December last year that it would maintain the benchmark interest rate unchanged and prioritize the stability of the rupiah to counteract the global economic uncertainty caused by changes in U.S. policy and heightened geopolitical risks. In the future, the Bank of Indonesia will closely monitor exchange rate fluctuations and inflation prospects when considering further easing monetary policy.
Looking ahead to 2025, the market generally believes that the dollar will continue to remain strong, although the space for further increases may be limited. As the Fed's rate cut policy gradually progresses and the effects of U.S. government economic policies become apparent, the dollar is expected to remain in the strong range of 100 to 105 in the first half of the year. Nonetheless, the foreign exchange market still faces uncertainties regarding the Fed's policy direction and U.S. economic performance, and short-term volatility cannot be overlooked.
On Monday, the dollar index dropped more than 1%, marking the largest single-day decline since November last year, as non-U.S. currencies rebounded and moved away from phase lows. Although the strong trend of the dollar may continue, the complexities of the global forex market could still bring new changes and challenges, and the policy responses of various countries are worth watching.
