The US dollar held near three-week highs against major currencies, amid expectations that the US Federal Reserve will make a decision to cut interest rates this week. However, analysts expect the central bank to signal a gradual approach to monetary easing policy during 2025. Bitcoin surpassed the $106,000 mark for the first time, reflecting optimism about the possibility of US President-elect Donald Trump forming a strategic cryptocurrency reserve. In addition, US Treasury yields rose, supporting a stronger dollar.
According to CME Group’s Feed Watch service, traders are confident that the Federal Reserve will cut interest rates by a quarter of a percentage point next Wednesday. However, officials expect to refrain from further cuts in January 2025, as inflation remains above the central bank’s annual target of 2%. In this context, policymakers have pointed out that the recent price increases are part of the difficult path towards easing inflationary pressures. Despite these expectations, analysts have warned that Trump taking office in January could renew inflationary pressures.
The USD index, which measures the greenback’s performance against a basket of currencies including the euro, the pound sterling and the yen, settled at 106.80 points by 06:05 GMT, after hitting 107.18 points at the end of last week, the highest level since November 26. Meanwhile, the USD rose 0.1% against the Japanese yen, to 153.87 yen, after earlier touching 153.91 yen, its highest level since Nov. 26. Despite inflationary challenges, the greenback remains in a strong position, reflecting the stability of markets and important movements ahead in the near future.
The impact of US dollar appreciation on currency markets
The rise of the US dollar is one of the factors that significantly affect the global currency markets. When the dollar rises, it can lead to multiple effects on other currencies and financial markets in general. One of the main effects is its negative impact on other currencies, as the dollar is one of the base currencies in which global trade transactions take place. If the dollar rises, investors tend to shift their investments to dollar-denominated assets, leading to weakening of other currencies.
Many major currencies such as the euro, the pound sterling, and the Japanese yen tend to depreciate against the dollar when the latter experiences a rise, putting pressure on the economies of countries that use these currencies. For example, if the dollar rises, importers in European and Asian countries may find themselves facing higher costs for goods imported from the United States, which could lead to increased inflation in those countries.
On the other hand, the rise of the dollar also affects the prices of dollar-denominated commodities such as oil and gold. A stronger dollar usually leads to lower prices for these commodities, as buying in dollars becomes more expensive for foreign investors. Therefore, the commodities sector can face challenges when the dollar appreciates its value. Moreover, the dollar’s rise is affecting emerging markets that rely heavily on foreign currencies to finance their debts. When the dollar rises, the cost of repaying these debts increases for developing countries, which can create additional economic pressures.
Overall, the strengthening of the dollar is a key factor in determining global economic trends and directly affects the movement of currencies and global markets.
Factors that support the dollar’s rise against currencies
The rise of the dollar against other currencies depends on a set of economic and financial factors that affect the purchasing power of the US currency. One of the main factors supporting the rise of the dollar is the monetary policy of the US Federal Reserve. When the US Federal Reserve adopts a policy of raising interest rates or tightens its monetary stance, it enhances the attractiveness of the dollar to investors, as high yields on US bonds provide an attractive investment opportunity compared to other currencies.
Moreover, the dollar is considered a safe haven in times of economic or political crisis. When global markets are tense due to financial crises, trade wars, or political volatility, investors tend to convert their money to the dollar as one of the safest assets, boosting the dollar’s strength. Increased demand for dollars in such periods reflects confidence in the economic and political stability of the United States.
US economic data also plays a crucial role in supporting the dollar’s rise. Strong reports on the growth of the US economy, such as GDP, employment, and inflation data, reflect the strength of the US economy compared to other economies, prompting investors to buy dollars. Also, rising US bond yields boost the dollar’s rise. In the event of higher yields on U.S. bonds, the dollar is more attractive to foreign investors, who seek higher yields than bonds in other economies. When U.S. bond yields are high compared to other economies, investors tend to buy dollars in order to invest in U.S. bonds. Ultimately, these factors combined contribute to strengthening the USD against other currencies.
