The Dollar was on track for its largest weekly gain in over a month on Friday, buoyed by expectations of fewer Federal Reserve rate cuts and the belief that President-elect Donald Trump's policies could drive US inflation once he assumes office.
Currency market volatility has been high this week as investors assess the potential boost to the Dollar from Trump's tax and tariff proposals, while also considering the impact of these plans on the global economy.
The dollar is hovering near a one-year high against a basket of currencies at 106.81, having surged nearly 1.8% this week, on track for its strongest performance since September, Reuters reports.
A major factor driving the Dollar's strength is the expectation that higher inflation under Trump will limit the Federal Reserve's ability to cut interest rates.
On Thursday, Fed Chair Jerome Powell echoed this sentiment, pointing to sustained economic growth, a strong labour market, and persistent inflation as key factors.
“What we're seeing is the Fed starting to get a little bit cautious because of what could be coming, although they need to remain data dependent, so they can't make policy on potential moves by Trump until they've actually happened,” said Fiona Cincotta, market strategist at City Index.
“The market's getting that sense of 'actually, next year we're not going to be seeing as many cuts as we were expecting',” she added.
Powell stated that the central bank did not need to hasten any interest rate cuts, leading traders to scale back their more aggressive expectations for a rate cut in the coming months.
According to the CME FedWatch tool, the probability of a December rate cut has fallen to below 50%, down from around 82% just a day earlier.
In Europe, the Pound barely reacted to data indicating that Britain's economy unexpectedly contracted in September, with growth slowing to a near standstill in Q3.
Sterling was headed for its largest weekly decline since January 2023, dropping by around 2%. It was last down 0.1% at the time of writing, at $1.2662.
Furthermore, the Euro has been one of the biggest casualties of the Dollar's strength this month. It has fallen to its lowest level in over a year, as traders weigh the potential impact of Trump's threatened tariffs on the eurozone economy, along with the expected deeper interest rate cuts that could follow.
The single currency rose 0.35% on the day to $1.0568, but was on track for a weekly decline of 1.4%. It has fallen in six of the last seven weeks.