US Dollar Forecast: DXY Uptrend Continues as Treasury Yields Reflect Inflation Risks

Dollar Posts Strong Annual Gains on Fed Policy and Trump Trade

The U.S. dollar closed the year with broad gains against most major currencies, driven by expectations of prolonged higher interest rates from the Federal Reserve and inflationary pressures tied to the incoming Trump administration’s policy agenda. Despite thin trading volumes ahead of the New Year holiday, the dollar maintained its dominance, reflecting strong demand as traders positioned for 2024.

The U.S. Dollar Index settled at 108.480, up 0.405 or +0.37%.

Higher Yields Support Dollar Strength

U.S. Treasury yields rose throughout the year as investors adjusted for the likelihood that the Fed will delay aggressive rate cuts to manage persistent inflation. With inflation remaining above the Fed’s 2% target, markets priced in a slower easing cycle compared to other central banks. This yield advantage bolstered the dollar, reinforcing its strength against lower-yielding currencies.

Lee Hardman, senior currency analyst at MUFG, noted that higher yields reflected potential inflationary effects from President-elect Donald Trump’s proposed policies, including tariffs, tighter immigration controls, and business deregulation. These measures are expected to fuel U.S. growth and elevate inflationary pressures, sustaining the dollar’s upward momentum.

Yen Declines on Rate Differential

The Japanese yen ended the year sharply lower, posting an 11.2% decline against the dollar. A widening interest rate gap between Japan and the U.S. weighed heavily on the yen throughout 2024. While analysts expect eventual support for the yen from Fed rate cuts and potential tightening by the Bank of Japan, near-term pressure remains.

Japanese authorities intervened multiple times this year to stabilize the yen, and traders are watching for further action if weakness persists in early 2025. The dollar closed at 156.93 yen, reflecting a modest 0.1% gain in the final trading session.

Euro and Sterling Register Losses

The euro and British pound also recorded annual losses against the dollar, although sterling showed relative resilience. The euro finished the year down 5.7% at $1.0382 as traders factored in the likelihood of sharper rate cuts from the European Central Bank compared to the Fed.

The pound declined 1.4% to $1.253, marking the smallest loss among major currencies against the dollar.

Market Outlook

As 2025 begins, the dollar is likely to retain its strength if the Fed remains cautious about rate cuts and Trump’s policies continue to drive inflation expectations. While potential interventions from Japan or ECB policy shifts could introduce volatility, the overall outlook for the dollar remains bullish in the near term.

More Information in our Economic Calendar.