Dollar on track for best week in a month by Reuters

Written by Karen Brettell

NEW YORK (Reuters) – The dollar fell on Friday, but was heading for its strongest weekly performance in a month on expectations that the U.S. economy will continue to outperform its global peers this year and that U.S. interest rates will remain relatively high.

A still-strong labor market and stubbornly high inflation have pushed up Treasury yields in recent weeks and boosted demand for the US currency.

New policies under the incoming Donald Trump administration, including business liberalization, tax cuts, reducing illegal immigration and tariffs, are also expected to boost growth and increase price pressures.

The index was last down 0.28% on the day to 108.91, after hitting a two-year high of 109.54 on Thursday. It is on track to achieve weekly gains of 0.85%.

Despite the dollar’s recent gains, there is still a great deal of uncertainty about when the new US government will introduce policies, and what their ultimate impact will be. This may halt the dollar’s rise in the near term.

“We’re likely to see a little bit of a pullback in the dollar as the administration comes in because all of these proposed tariffs — they’re going to take some time to implement and we don’t actually know if all of these proposals are going to be implemented or not.” “Will it be implemented or not?” said Helen Giffen, a foreign exchange trader at Monex USA in Washington.

“As we go through the second half of this calendar year, I think we will see more dollar strength,” Geffen said.

The dollar briefly pared losses after data on Friday showed that US manufacturing was close to a recovery in December, with production rebounding and new orders rising further.

The euro faces a weaker growth outlook and could be hurt by US tariffs, as the European Central Bank is expected to cut interest rates further than the Federal Reserve this year.

Traders expect 100 basis points of interest rate cuts by the European Central Bank by the end of the year, and a less than certain chance of 50 basis points of cuts by the Federal Reserve.

Uncertainties, including the French budget battle and the German elections, are also weighing on the single currency.

The euro rose in recent transactions by 0.39 percent to $1.0305, but it is heading towards a weekly loss of 1.22 percent, which is the worst since early November.

The British pound rose 0.41 percent to $1.2431. It was on track to lose nearly 1.15% for the week, the biggest loss since early November.

The dollar fell 0.26 percent to 157.11 Japanese yen, remaining slightly below the five-month high of 158.09 that it reached in December.

The Japanese currency has suffered from the wide interest rate differential between the US and Japan, as the Bank of Japan’s warning about further interest rate hikes has caused more pain for the yen.

China reached its weakest level in more than a year at 7.3199 to the dollar, as lower yields and expectations of further domestic interest rate cuts continued to weigh on the currency.

In cryptocurrencies, Bitcoin rose 1.59% to $98,658.