Dollar Faces Pullback but Remains on Track for Strongest Weekly Performance in a Month

The U.S. dollar experienced a slight dip on Friday but is set to mark its strongest weekly performance in a month, driven by expectations that the U.S. economy will continue to outpace global counterparts this year. Additionally, the anticipation of U.S. interest rates remaining relatively high has fueled demand for the dollar.
A robust labor market and persistent inflation have contributed to the recent rise in Treasury yields, further strengthening the U.S. currency. New policies expected from the incoming Donald Trump administration, including deregulation, tax cuts, and measures to curb illegal immigration, are predicted to stimulate growth and drive inflationary pressures.
At the close of trading, the dollar index was down by 0.28% at 108.91, after hitting a two-year high of 109.54 on Thursday. Despite the slight drop, the index is poised for a weekly gain of 0.85%.
However, uncertainty surrounds the timing and implementation of the new U.S. government policies, which could slow the dollar’s rally in the short term. Helen Given, FX trader at Monex USA, commented, “We’re likely to see a bit of a dollar pullback as the administration comes in, given the time it will take to implement proposed tariffs and the uncertainty around their final execution.” She added that dollar strength could return in the latter half of the year.
The dollar briefly reversed its losses following positive manufacturing data on Friday, indicating that U.S. production is moving closer to recovery. The data showed a rebound in production and an increase in new orders, further supporting the greenback.
Meanwhile, the euro faces a weaker growth outlook and potential negative impacts from U.S. tariffs. The European Central Bank (ECB) is expected to cut rates more aggressively than the U.S. Federal Reserve this year, with traders pricing in a 100-basis-point reduction by the ECB and only a slim chance of a 50-basis-point cut by the Fed. Uncertainty surrounding the French budget and German elections is also weighing on the euro. The euro rose 0.39% to $1.0305 but was still set for a 1.22% weekly decline, its worst performance since early November.
Sterling saw a modest gain of 0.41% to $1.2431 but is on track to lose around 1.15% for the week, marking its worst weekly performance since early November.
The Japanese yen slid 0.26% to 157.11, remaining just below a five-month high of 158.09 reached in December. The yen has been under pressure due to the widening interest rate differential between the U.S. and Japan, with the Bank of Japan’s cautious stance on rate hikes continuing to hurt the currency.
China’s onshore yuan hit its weakest level in over a year at 7.3199 per dollar, as falling yields and expectations of more domestic rate cuts put continued pressure on the currency.
In the cryptocurrency market, Bitcoin gained 1.59%, reaching $98,658.