CaliToday (01/11/2025): The U.S. dollar climbed to its highest level in three months on Friday, extending gains as investors flocked to the safe-haven currency amid growing caution over the global economic outlook and a significant repricing of the Federal Reserve's policy path.
The dollar's strength was evident across the board during Asian and early European trading. The rally comes after a volatile week defined by mixed signals from global central banks, lukewarm tech earnings on Wall Street, and lingering uncertainty despite a temporary U.S.-China trade truce.
The DXY (U.S. Dollar Index), which measures the greenback's strength against a basket of six major currencies, held firm at 99.478. The index was propelled by a "risk-off" wave that swept global markets following a dip on Wall Street Thursday, increasing demand for the dollar as a safe harbor.
Fed Rate Cut Hopes Diminish
The primary driver behind the dollar's surge is a dramatic shift in interest rate expectations. Traders are no longer convinced that the U.S. Federal Reserve will continue its easing cycle.
According to the CME FedWatch Tool, the market-implied probability of another 25-basis-point rate cut at the Fed's upcoming December 10 policy meeting has plummeted to 74.7%. This is a stark reversal from just one week ago when the probability stood at a near-certain 91.1%.
This hawkish shift has sent U.S. bond yields climbing. The 10-year Treasury note yield, a key benchmark for global borrowing costs, held near its three-week high at 4.0989%.
"Risk aversion sentiment is skewing in favour of the USD," said Rodrigo Catril, a senior currency strategist at National Australia Bank (NAB) in Sydney.
"The [Fed] is now non-committal on whether it will cut rates again," Catril added, noting that this uncertainty is the dollar's main support.
Global Central Banks Diverge
The dollar's strength is also being amplified by the monetary policies of other major central banks.
Japan (JPY): The Japanese yen remained under pressure. The Bank of Japan (BOJ) held its policy rates steady on Thursday, but new data showed that core inflation in Tokyo—a leading indicator for the country remains stubbornly above the BOj's 2% target. This complicates the BOJ's path forward, trapping them in a low-rate policy despite inflation.
"The yen's weakness on the back of the BOJ is not helping" the regional sentiment, noted NAB's Catril.
Adding to the currency narrative, Japan's new Finance Minister, Satsuki Katayama, on Thursday retracted a personal comment she made in March (before her appointment) that the yen’s fair value should be around 120–130 per dollar. She clarified that as minister, she is now responsible for managing FX policy and would not target specific levels.
Europe (EUR): The euro (EUR/USD) managed a slight 0.1% gain to $1.1572 but remained on the defensive. On Thursday, the European Central Bank (ECB) held its key interest rate at 2.0% for the third consecutive meeting. The ECB signaled that its policy is in a "good position" as economic risks in the bloc subside, suggesting a long pause but no immediate challenge to the Fed's higher rates.
China (CNH): The offshore Chinese yuan (USD/CNH) was mostly flat at 7.1089. Traders are in a holding pattern, cautiously awaiting the release of China's crucial October manufacturing PMI data later on Friday, which will offer a fresh health check on the world's second-largest economy.