The US dollar remained in a strong position this week, approaching a two-year high against a basket of currencies. In the latest trade, the dollar index rose 0.02% to 108.45, reflecting its continued strength in global markets. The dollar is expected to end the week 1.4% higher, supported by expectations that the US interest rate hike will continue for a longer period, boosting the greenback’s appeal as a safe haven.
These forecasts confirm that markets are considering minor rate cuts for 2025, but expectations indicate that those cuts will be below 40 basis points, suggesting that US monetary policy will remain relatively tight next year. In contrast, the Japanese yen was struggling to halt its losses, falling to new lows against the dollar. Despite the yen’s attempts to strengthen itself, the Japanese currency has suffered from continued weakness due to the large gap in monetary policy between Japan and the United States, as interest rates in Japan remain at very low levels compared to their American counterparts.
The US dollar is poised to end the week on a strong note, as this strong performance reflects the currency’s relative stability in light of the current economic outlook. As markets await U.S. monetary policy developments in 2025, all eyes remain on fresh signals from the Federal Reserve on interest rates and future policy directions.
The US dollar remains in a strong position supported by expectations of continued rate hikes, while the Japanese yen faces challenges due to mixed monetary policy. The Japanese yen suffers from continued weakness due to the large gap in monetary policy between the United States and Japan.
The impact of the rise in the dollar on global economy
The appreciation of the US dollar is one of the factors that significantly affect the global economy. When the USD strengthens, as is currently happening, it has manifold effects on many economic sectors, both domestically and globally. Among the most prominent of these effects, we find effects on international trade, as the strength of the dollar makes American goods more expensive for importers from other countries. This may lead to a decline in demand for U.S. products by foreign markets, affecting U.S. exports and reducing the profits that U.S. companies make from these exports.
On the other hand, the rise in the dollar reflects an increasing cost of debt for countries and companies that borrow in foreign currencies. The appreciation of the dollar means that those countries and companies will face a greater burden in paying off their dollar-denominated debts, which could lead to increased financial pressure on their economies. In emerging markets, for example, a stronger dollar can make it difficult to finance debt, which could exacerbate economic crises in those countries.
Moreover, the dollar’s rise affects global financial markets. Many investors prefer to shift their money to dollar-denominated assets, such as U.S. bonds, given the strength of the currency, which can lead to lower demand for other assets in global markets. This can lead to volatility in the stock and commodity markets, as some commodities, such as gold and oil, are seeing prices fall due to the strength of the dollar. On the other hand, the global economy is witnessing varying effects based on the varying strength of local currencies against the USD.
Factors that may contribute to supporting the USD
Many factors contribute to supporting the strength of the US dollar, resulting from the interaction of various global and local economic variables. One of the most prominent of these factors is the US Federal Reserve’s monetary policy. When the Federal Reserve adopts a policy of raising interest rates or signals an intention to raise them in the future, it enhances the dollar’s attractiveness to investors looking for higher yields. Higher interest rates increase the flow of foreign capital into the United States, supporting demand for the dollar.
Another factor is economic growth in the United States. When the U.S. economy experiences sustained growth, it boosts confidence in the U.S. economy and increases demand for the dollar. For example, strong growth in the US economy leads to improved employment and higher productivity, strengthening the dollar’s strength in global markets. In addition, economic and political stability in the United States plays an important role in supporting the dollar, as the dollar is considered a safe haven in periods of global economic instability or political crises.
Another factor contributing to the dollar’s strength is the decline in commodity prices such as oil. Since most global commodities price in dollars, lower oil prices reduce demand for other currencies and increase the dollar’s relative strength. Moreover, the US dollar serves as the main currency traded in global currency markets, reinforcing its role as the primary reserve currency in most major economies, especially considering the high levels of public debt in many major economies.