Will High U.S. Rates Drive Dollar Gains Over Gold at the Start of the New Year?

Will High Interest Rates Keep the Dollar Strong in 2025 at the Expense of Gold?

As 2024 wraps up with the U.S. dollar posting a 7% annual gain, traders are preparing for continued high U.S. interest rates into 2025. The Federal Reserve’s reluctance to cut rates contrasts with more accommodative policies from the Bank of Japan (BoJ) and the European Central Bank (ECB). This policy gap raises the question: Will elevated U.S. rates continue to drive dollar strength at the cost of gold prices next year?

Can the Dollar Keep Rising on Rate Differentials?

The U.S. Dollar Index (DXY) is set to finish 2024 up 6.6%, reflecting solid economic growth and the Fed’s cautious stance on easing. Fed Chair Jerome Powell has indicated that policymakers remain hesitant to cut rates aggressively, with only 37 basis points (bps) of rate reductions priced in for 2025. By contrast, markets expect the ECB to cut rates by 100 bps by mid-year.

This divergence has been mirrored in bond markets. U.S. 10-year Treasury yields have climbed to 4.607%, the highest level since May, while the 2-year yield stands at 4.33%. The wide yield gap between U.S. and foreign bonds continues to support demand for the dollar.

Will Weak Yen and Euro Continue to Fuel Dollar Strength?

The yen and euro remain under strain, reinforcing dollar strength. The yen has fallen 11.8% against the dollar this year, and the euro is trading near two-year lows around $1.042. The BoJ’s decision to hold rates steady, citing uncertainty about U.S. trade policy under the Trump administration, has left the yen vulnerable.

Similarly, ECB officials signal further rate cuts to address slowing growth, contributing to weakness in the euro.

With the U.S. economy outperforming major peers and U.S. equities maintaining their strength, global capital continues to favor dollar-denominated assets. This relative resilience, paired with expectations for slower rate cuts, strengthens the dollar’s position heading into 2025.

Is Gold Running Out of Steam as Yields Rise?

Gold, which has gained 28% this year, faces increasing pressure from higher yields. Rising Treasury returns raise the cost of holding non-yielding assets like gold. As the 10-year Treasury yield climbed past 4.6%, gold dipped 0.2% to $2,628 per ounce. Although gold remains supported by inflation concerns and geopolitical risks, its near-term performance may be limited if bond yields continue to rise.

What Could Disrupt the Dollar-Gold Balance in 2025?

Unless the Fed pivots more aggressively toward rate cuts, the dollar’s upward trend is likely to persist. With the yen and euro under pressure from dovish policies abroad, the dollar may continue to outperform. Gold could face resistance in sustaining current price levels, but if inflation unexpectedly accelerates or economic uncertainty grows, safe-haven demand for gold may resurface. Traders will need to monitor central bank decisions closely, as any deviation from current expectations could shift the balance between the dollar and gold.

More Information in our Economic Calendar.