Dollar Strengthens as Yen Rebounds

(Reuters) – The dollar rose broadly on Monday, holding near a two-year high, while the Japanese yen edged up from five-month lows against the greenback as traders continued to digest the likelihood that the Federal Reserve will make fewer rate cuts next year.

The U.S. currency has rallied in recent weeks on expectations for a less dovish U.S. central bank as inflation remains above the Fed’s 2% annual target. Analysts also expect policies from President-elect Donald Trump’s U.S. administration to bolster growth and add to price pressures next year.

Fed policymakers this month cut their interest-rate forecast for 2025 to 50 basis points of cuts, from 100 basis points, and Fed Chair Jerome Powell said further reductions in borrowing costs now hinge on progress in lowering inflation.

The dollar index is on track for a 6.6% gain this year, last up 0.1% on the day at 108.08, after reaching a two-year high of 108.54 on Dec. 20.

The yen has suffered from a wide interest-rate differential between Japan and the United States, with the dollar on pace for an 11.4% return against the Japanese currency this year, marking its fourth yearly increase. It was last down 0.51% at 157.02 yen.

Some analysts see the yen likely to benefit next year from expected Bank of Japan interest-rate hikes while the Fed eases, though rising U.S. Treasury yields have not yet been reflected in the exchange rate.

Fawad Razaqzada, market analyst at City Index, said, “With above-target inflation remaining persistent for much of 2024, price pressures could increase further should the yen weaken even more. To support its currency, the Bank of Japan may wish to start raising rates more meaningfully.”

Bank of Japan policymakers have noted conditions may soon be right for a rate hike, with one expecting a move “in the near future,” keeping alive the chance of a January hike. Traders are also watching for potential intervention by Japanese officials if the yen continues to weaken.

Japan Finance Minister Katsunobu Kato reiterated concerns over a sliding yen, stating the government would take action against excessive currency moves.

The euro is set for a 5.8% drop against the dollar this year, following the European Central Bank’s four interest rate cuts in 2024, with markets expecting the ECB to cut rates more rapidly than the Fed in 2025. The euro was last down 0.25% at $1.0401.

Representatives of the ECB have indicated that the next rate cut may be delayed following a recent uptick in inflation, as noted by Governing Council member Robert Holzmann.

Sterling fell 0.26% to $1.2546 and appears set for an annual loss of 1.4%.

Bitcoin fell 0.17% to $94,222, down from a record high of $108,379.28 on Dec. 17, and has surged about 122% this year.