Dollar Kicks Off 2025 with Strength
The US dollar is making a strong start to 2025, continuing to gain value in global markets. Increased demand, driven by seasonal, technical, and fundamental factors, supports the dollar's rise. The dollar index is currently at 108.4, moving at a two-year high.
Recently, the increase in speculative dollar positions reflects investors' expectations that the dollar will continue to appreciate. The expectation that the US economy will show stronger growth compared to other major economies, along with the Fed's intention to keep interest rates high, are key factors driving dollar demand.
The dollar strengthens against the euro and the pound; following strong labor market data in the US, the dollar reached its highest level against the euro in two years and against the pound in eight months. Data released on Thursday showed that US jobless claims fell to the lowest level in eight months, boosting investor confidence in the US economy. The pound depreciated by 1.3% against the dollar, dropping to $1.2354, the lowest level since the end of April, while the euro fell by 0.9% to $1.0267. The dollar index is set to post its best weekly performance in over a month with a 1.1% increase.
Expectations for interest rates are supporting the dollar. The resilient growth of the US economy, along with ongoing inflation pressures, is raising expectations that the Fed will limit the pace of interest rate cuts. Market forecasts indicate that the Fed is expected to lower interest rates by only 0.43 percentage points by the end of 2025, while the Bank of England is projected to cut rates by 0.59 percentage points, and the European Central Bank by 1.08 percentage points.
This situation supports the dollar's appreciation against other major currencies, while weak growth forecasts in the UK and the eurozone intensify pressure on the pound and euro. Additionally, weak manufacturing data from the UK and eurozone, coupled with the risk of rising natural gas prices, contribute to the decline in these currencies.
As the dollar rises, volatility is seen in the stock markets. US stocks lost gains made in the early hours on Thursday due to the strengthening dollar, closing the day lower. The S&P 500 and Nasdaq Composite indexes both declined by 0.2%. Analysts note that the strong performance of the dollar leading up to the end of the year has made heavily held currencies, like the pound, more vulnerable. This indicates that the dollar is likely to continue its dominant role in global markets in 2025.