By Naomi Rovnick and Ankur Banerjee
LONDON, SINGAPORE (Reuters) – The U.S. dollar was on track for an annual gain of almost 7%, while the Japanese yen was set to lose for the fourth year in a row on Friday, as traders expected robust U.S. growth to make the Federal Reserve cautious with interest rate cuts well into 2025.
The dollar index, which measures the currency against major rivals, rose 0.08% to 108.06 to approach a monthly gain of 2.2% and was on track to end 2025 6.6% higher .
The dollar also approached a 5.5% gain against the yen this month and an 11.8% gain for 2024 against the weakened Japanese currency, while the euro remained near two-year lows.
Fed Chairman Jerome Powell said earlier this month that US central bank officials will be “cautious about further cuts” after an expected quarter-point rate cut.
The US economy is also facing the impact of newly elected President Donald Trump, who has proposed deregulation, tax cuts, tariff increases and tighter immigration policies, which economists say are both pro-growth and inflationary.
Meanwhile, traders expect the Bank of Japan to keep monetary policy loose and the European Central Bank to make further interest rate cuts.
The yen on Friday hovered around levels last seen in July at 157.75 per dollar, while the euro traded at $1.042, just above a December 18 low of around $1.04.
Traders are pricing in a US interest rate cut of 37 basis points in 2025, with no cut being fully passed on to money markets until June. By then, the ECB is expected to have cut its deposit rate by a full percentage point to 2% as the eurozone economy slows.
The BoJ hesitated to raise interest rates this month. Governor Kazuo Ueda said he preferred to wait for clarity on Trump’s policies, underscoring growing fears among central banks around the world about US tariffs affecting global trade.
For now, the dominance of U.S. stocks in world indices and weaker currencies in Asia and Europe, which are helping to boost exporters, have prevented tighter U.S. monetary policy from weighing on global stocks.
MSCI’s broad global stock index traded 0.1 higher on Friday and remains up 1.5% for the week, while Wall Street’s S&P 500 was on track for a weekly gain of 1.8%.
Futures trading indicated the S&P would start the New York session about 0.4% lower.
MSCI’s broadest index of Asia-Pacific shares outside Japan was heading for a weekly rise of 1.5% and Tokyo’s Nikkei ended the week 2% higher.
European shares lagged, with the Stoxx 600 flat on Friday and up 0.3% this week.
Analysts said stock markets could change direction as investors return from vacation and reassess the risks of increased U.S. inflation under Trump for richly valued Wall Street stocks.
