HG MARKETS:

The U.S. dollar was poised for an annual gain of nearly 7% on Friday, while the Japanese yen faced its fourth consecutive year of depreciation, as traders anticipated strong U.S. economic growth would prompt the Federal Reserve to adopt a cautious approach to rate cuts well into 2025. The dollar index, which measures the currency against a basket of major peers, rose 0.08% to 108.16, marking a 2.2% monthly increase and positioning the greenback for a 6.6% gain for the year. Against the yen, the dollar advanced 5.5% this month and 11.8% for 2024, while the euro lingered near two-year lows.

Earlier this month, Federal Reserve Chair Jerome Powell noted that policymakers would remain “cautious about further cuts” following a widely anticipated quarter-point rate reduction. In the broader context, the U.S. economy is preparing for the policy impact of President-elect Donald Trump, who is set to take office later this month. His agenda, which includes deregulation, tax cuts, tariffs, and tighter immigration controls, is viewed by economists as both pro-growth and inflationary.

Meanwhile, the Bank of Japan (BoJ) is expected to maintain its ultra-loose monetary policy, and the European Central Bank (ECB) is anticipated to deliver further rate cuts. The yen traded around 157.76 per dollar on Friday, its weakest since July, while the euro hovered at $1.042, slightly above its December 18 low of $1.04. Traders have priced in 37 basis points of U.S. rate cuts in 2025, with no reductions fully reflected in money markets until June. By contrast, the ECB is expected to lower its deposit rate by 100 basis points to 2% as the Eurozone economy slows. The BoJ refrained from a rate hike this month, with Governor Kazuo Ueda signaling a preference to wait for greater clarity on the potential impact of U.S. trade policies, highlighting growing global concerns about U.S. tariffs affecting international trade.

Despite tighter U.S. monetary policy, the dominance of U.S. equities in global indices and weaker currencies in Asia and Europe has supported exporters, limiting the broader impact on global equity markets. MSCI’s global share index traded flat on Friday but remained 1.6% higher for the week. Wall Street’s S&P 500 was on track for a 1.8% weekly gain, while MSCI’s Asia-Pacific index (excluding Japan) advanced 1.5% for the week. Tokyo’s Nikkei closed the week 2% higher. However, stock markets may shift direction as investors return from holiday breaks and reassess the implications of elevated U.S. inflation under the Trump administration for Wall Street’s high valuations.

In fixed income markets, higher U.S. rate expectations pushed the 10-year Treasury yield to its highest level since early May, reaching 4.607% on Friday. The two-year Treasury yield, which is more sensitive to interest rate projections, traded around 4.33%. Rising U.S. yields also lifted Eurozone debt yields, with Germany’s benchmark 10-year bund yield climbing 5 basis points to 2.372% on Friday.