By Rae Wee
SINGAPORE (Reuters) – The dollar strengthened on Tuesday as expectations of prolonged high U.S. interest rates dominated investor sentiment, leaving other currencies languishing near significant lows.
With the holiday season approaching, trading volumes are expected to wane. Additionally, the absence of key economic data releases will likely keep the focus on interest rates as the main influence in the foreign exchange market.
The yen remained close to a five-month low, last quoted at 157.19 per dollar, already down 4.7% this month, prompting traders to be vigilant for potential intervention from Japanese officials.
Last week, the Bank of Japan (BOJ) kept rates steady and was ambiguous about future rate hikes, contrasting sharply with the Federal Reserve’s hawkish stance. The Fed indicated a gradual approach to rate cuts in 2025.
This divergence in policies has caused the yen to weaken, struggling to recover its losses.
“The Fed-BOJ policy divergence is likely to exert further downward pressure on the JPY,” remarked Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho (NYSE:) Bank.
“Despite potential increases in volatility, JPY carry trades could remain viable, supported by favorable carry returns and reduced capital risks associated with a JPY squeeze.”
Meanwhile, the euro was last at $1.0403, hovering near the two-year low it hit in November, while sterling slipped 0.01% to $1.2534.
In comparison to a basket of currencies, the U.S. dollar was near its two-year peak of 108.54, trading last at 108.10.
While a mild U.S. inflation report on Friday eased some worries about the pace of Fed rate cuts next year, markets are still anticipating around 35 basis points of easing in 2025, thus supporting the dollar’s value.
“We expect the dollar to gain further traction next year as the U.S. economy outperforms, widening the interest rate differential between the U.S. and other G10 nations, compounded by higher U.S. tariffs under the Trump administration,” stated Jonas Goltermann, deputy chief markets economist at Capital Economics.
As U.S. President-elect Donald Trump prepares to return to the White House in January, global central banks are urging caution regarding their monetary policies due to uncertainties concerning how Trump’s proposed tariffs, tax cuts, and immigration restrictions might impact the economy.
In Australia, the Australian dollar dipped 0.11% to $0.6242, while the New Zealand dollar fell 0.04% to $0.5648.
The Reserve Bank of Australia (RBA) is set to release the minutes from its December policy meeting later today, marking the last significant event on the economic calendar for the year.
Earlier this month, the RBA maintained its policy stance but unexpectedly suggested the possibility of a rate cut in the upcoming year.
