The US dollar made modest gains on Thursday, recovering from earlier losses seen at the start of the week when concerns about potential Federal Reserve policy easing had pressured the currency. At 03:00 ET (08:00 GMT), the Dollar Index, which measures the greenback against six other major currencies, traded up 0.1% at 98.980, positioning for a slight increase over the week.
Earlier in the week, the dollar fell sharply after Federal Reserve Chair Jerome Powell revealed that the Trump administration had threatened criminal charges related to his testimony about renovations at the Fed’s headquarters. Powell described this as an attempt to pressure the central bank into pursuing more accommodative monetary policy.
However, markets steadied as investors digested the news and responded to President Donald Trump’s statement on Wednesday that he had no immediate plans to dismiss Powell, though he did not rule out action in the future. The dollar’s recovery was also supported by recent US economic data showing a rise in producer prices in November, driven in part by a jump in gasoline costs, and stronger-than-forecast retail sales increases for the same month.
Analysts at ING noted that the Federal Reserve’s Beige Book, released overnight, indicated that eight of the twelve Fed districts experienced flat or rising activity, and labor markets showed no signs of weakening. ING commented that expectations of policy easing had been pushed back, suggesting the market may soon remove expectations of a second Fed rate cut this year, a dynamic that tends to support the dollar.
In European currency markets, the euro fell slightly by 0.1% to $1.1633 EUR/USD after Denmark’s Foreign Minister Lars Lokke Rasmussen expressed a “fundamental disagreement” with the US during discussions concerning Greenland’s future. This followed meetings between Danish and Greenlandic officials and US figures including Secretary of State Marco Rubio and Vice President JD Vance at the White House.
Despite these diplomatic tensions, ING noted that volatility in the EUR/USD pair remained near multi-year lows, with no clear catalysts likely to shift the currency’s trajectory, which currently appears to be slowly approaching the 1.1600 level.
The British pound saw small gains, moving up to 1.3440 GBP/USD following the release of November growth data that exceeded expectations. The UK economy advanced by 0.3% month-over-month, outpacing the anticipated 0.1%. ING suggested that the recent correction in sterling may continue somewhat further, particularly with the risk of an upside surprise in the upcoming December UK Consumer Price Index (CPI) report.
Turning to Asia, USD/JPY increased by 0.2% to 158.63, staying close to an 18-month high reached at 159.45 the previous day. The Japanese yen’s decline is attributed to speculation that Prime Minister Sanae Takaichi may call an early general election in February. Market participants view a potential Takaichi administration as negative for the yen, citing her support for expansionary fiscal policies, increased government spending, and continuous monetary stimulus.
Investors worry that such fiscal stimulus could restrict the Bank of Japan’s ability to move toward normalizing monetary policy, thereby widening yield differentials with the US and exerting further downward pressure on the yen.
Other currency movements saw USD/CNY slip 0.1% to 6.9700, AUD/USD climb 0.1% to 0.6686, and USD/KRW rise 0.5% to 1469.49. The Korean won's rebound followed a sharp previous-day fall after US Treasury Secretary Scott Bessent commented that the won's recent depreciation was inconsistent with South Korea's economic fundamentals.
Key Points:
- The US dollar showed resilience, rebounding from earlier losses as Federal Reserve rate cut expectations diminished, supported by robust US inflation and retail data.
- Euro weakened amid diplomatic tensions between the US and Greenland, with Denmark reporting fundamental disagreements following high-level talks.
- British pound gained modestly on stronger-than-anticipated economic growth, with potential for further appreciation pending inflation data.
- Japanese yen weakened amid speculation of an early general election and concerns about expansive fiscal policies limiting monetary policy normalization.
- Other Asian currencies experienced mixed movements influenced by economic fundamentals and official comments.
Risks and Uncertainties:
- Political uncertainties in Japan, including potential snap elections, could exacerbate yen volatility and impact regional markets.
- Diplomatic frictions related to Greenland could weigh on euro performance and broader EU-US relations.
- Shifting expectations around Federal Reserve policy tightening or easing cause currency market fluctuations, affecting import-export costs and multinational financial strategies.
Disclosure: The analysis reflects data available as of Thursday and does not incorporate subsequent market developments.