Dollar set for best week since November on US rates, economic outlook

Highlights: 

• Dollar holds near two-year high
• Dour euro zone outlook pressures euro
• Traders price in about 45bps of Fed rate cuts in 2025

The dollar was on track for its best weekly performance in over a month on Friday, underpinned by expectations of fewer Federal Reserve rate cuts this year and the view that the US economy will continue to outperform the rest of its peers globally.

The greenback began the new year on a strong note reaching a more than two-year high of 109.54 against a basket of currencies on Thursday as it extended a stellar rally from last year.

Its charge higher has come on the back of a more hawkish Fed and a resilient US economy.

"Looks like dollar strength is here to stay for now in early 2025 given the US exceptionalism story is here to stay, and it still comes with high US yields," said Charu Chanana, chief investment strategist at Saxo.

"Add to that the uncertainty from policies of the incoming (Donald) Trump administration, and you also get the safety aspect of the dollar looking attractive."

Ahead of US President-elect Trump's inauguration on Jan. 20, markets have taken his impending return to office with caution due to uncertainty over his plans for hefty import tariffs, tax cuts and immigration restrictions.

That has in turn given the greenback additional safe haven support.

The dollar index last stood at 109.17 and was on track for a weekly gain of just over 1%, its strongest since November.

The euro was meanwhile among the biggest losers against a towering dollar, having tumbled 0.86% in the previous session to a more than two-year low of $1.022475.

"As far as the euro zone's concerned, there could be the direct impact of higher trade tariffs on the euro zone or (its) economies, but even perhaps more pertinently, the higher tariffs on China, which will also sort of be that weakness in the euro zone," said Kyle Rodda, senior financial market analyst at Capital.com.

The common currency last bought $1.0270 and was headed for a 1.6% weekly decline, its worst since November.

Similarly, sterling ticked up 0.09% to $1.2391, after sliding 1.16% on Thursday. It was on track to lose roughly 1.6% for the week.

Also helping the dollar extend its dominance against other currencies was the prospect of widening rate differentials between the US and the rest of the world.

While traders are now pricing in just about 45 basis points worth of rate cuts from the Fed this year , they see more than 100 bps worth of easing from the European Central Bank and roughly 60 bps from the Bank of England .

Elsewhere, the yen rose 0.14% to 157.295 per dollar, but stood not too far from an over five-month low of 158.09 per dollar hit in December.

The Japanese currency has been a victim of the stark interest rate differential between the US and Japan for over two years now, with the Bank of Japan's caution over further rate increases spelling more pain for the yen.

The yen tumbled more than 10% in 2024, extending its losses into a fourth straight year.

Down Under, the Australian dollar edged 0.2% higher to $0.6216 but remained pinned near a more than two-year low, and was on track to decline 0.2% for the week.

The New Zealand dollar rose 0.16% to $0.5606, but was likewise headed for a weekly loss of 0.66%.