By Karen Brettell
NEW YORK (Reuters) -The dollar fell on Friday but was on track for its strongest weekly performance in a month on expectations that the U.S. economy will continue to outperform its peers globally this year and U.S. interest rates will remain relatively higher .
A still-solid labor market and persistently high inflation have pushed Treasury yields higher in recent weeks and increased demand for the U.S. currency.
New policies under the incoming administration of Donald Trump, including business deregulation, tax cuts, curbs on illegal immigration and tariffs, are also expected to boost growth and increase price pressures.
The stock last fell 0.28% that day at 108.91, after hitting a two-year high of 109.54 on Thursday. It is on track for a weekly gain of 0.85%.
Despite recent dollar gains, significant uncertainty remains about when policies will be introduced by the new US administration, and what their ultimate impact will be. That could interrupt the dollar’s rally in the short term.
“We will probably see a small pullback in the dollar when the administration comes in because all these proposed tariffs will take some time to implement and we don’t actually know if all these proposals will actually be implemented. implemented or not,” says Helen Give, FX trader at Monex USA in Washington.
“As we get through the second half of this calendar year, I think we’ll see some more strength from the dollar,” Seen said.
The dollar pared losses shortly after data on Friday showed the U.S. manufacturing sector moved closer to recovery in December, with output rebounding and new orders rising further.
The euro faces weaker growth prospects and could be hit by US rates, with the European Central Bank expected to cut rates further this year than the Federal Reserve.
Traders are pricing in a 100 basis point rate cut by the ECB by the end of the year, and only a less-than-certain chance of a 50 basis point rate cut by the Fed.
Uncertainties, including the French budget battle and the German elections, are also weighing on the single currency.
The euro last rose 0.39% to $1.0305, but was heading for a weekly decline of 1.22%, the worst since early November.
Sterling gained 0.41% to $1.2431. It was on track to lose about 1.15% this week, its biggest loss since early November.
The dollar fell 0.26% to 157.11 Japanese yen, remaining just below a five-month high of 158.09 reached in December.
The Japanese currency has suffered from the large interest rate differential between the US and Japan, with the Bank of Japan’s caution about further rate hikes meaning even more pain for the yen.
Chinese yields reached their weakest level in more than a year at 7.3199 per dollar, as falling yields and expectations of more domestic rate cuts continued to weigh on the currency.
In cryptocurrencies, bitcoin gained 1.59% to $98,658.
