The US dollar index is poised to break the 110 mark for the highest level in more than two years, fueled by robust economic indicators that temper expectations for aggressive interest-rate cuts, along with President-elect Donald Trump’s threats of imposing strict tariffs, which have bolstered confidence in the greenback.
The dollar index reached 109.39 on January 2 before dipping slightly lower by 0.28% to 109.08 on January 3. The index recorded 110.55 in early November 2022 and has been declining ever since.
This rally comes as developed world currencies have all faltered against the dollar, prompting other central banks to implement supportive measures for their own economies.
The factor behind the rally has been the economy’s strength. This resilience ensures that the Federal Reserve is aligning towards a moderate rate-cutting cycle, keeping US interest rates above those in other regions, thereby sustaining historically high dollar valuations.
Meanwhile, the onshore yuan has fallen past a key threshold previously defended by China, signaling potential for further depreciation amidst economic challenges. This development comes as the yuan breached the psychologically significant 7.3 per dollar mark for the first time since late 2023. Concerns are mounting over China’s economic woes and the increasing yield gap between Chinese and US bonds.
Despite the People’s Bank of China’s (PBOC) consistent support through its daily reference rate, the currency’s move suggests a possible strategic shift by the central bank to address economic stagnation by allowing the yuan more flexibility. This change comes after the yuan had been held relatively stable, leading to its highest valuation against trading partners’ currencies since 2022, a position that could hurt China’s export competitiveness.
