The U.S. Dollar Remains Dominant, Pressuring Non-U.S. Currencies

In 2024, the U.S. dollar index (DXY) emerged as the strongest performer in the forex market, despite the Federal Reserve's cumulative 100-basis-point rate cuts. The index gained nearly 7% for the year. As 2025 began, the dollar's strength persisted, breaking above the 109 mark in early January and hovering near 108, representing a more than 2% increase since December 2024.

Analysts attribute the dollar's resilience to the relative strength of the U.S. economy and interest rate outlook. According to the financial markets division of China Construction Bank, the robust U.S. labor market remains a key factor. For example, initial jobless claims for the week ending December 28 dropped to an 8-month low, reducing expectations for further Fed rate cuts. In contrast, weaker economic fundamentals in the Eurozone, the UK, and other non-U.S. economies have reinforced the dollar's comparative advantage.

The strong dollar has significantly impacted non-U.S. currencies, particularly in Asia. Exchange rates in countries such as Indonesia, Vietnam, India, Japan, and South Korea are under severe depreciation pressure. On January 6, the Bloomberg Asia Currency Index fell to 89.0409, its lowest point since 2006. The Japanese yen extended its losses, dipping below 158 against the dollar, while the Indian rupee hovered near record lows, closing at 85.7033 on January 8.

In response to exchange rate volatility, several countries have pledged to stabilize their currencies. Japan issued its first forex intervention warning of 2025, expressing concern over sudden and unilateral market fluctuations. Japanese Finance Minister Shunichi Suzuki emphasized that the government would take appropriate action if excessive currency moves occurred. Last year, Japan's central bank intervened in the forex market multiple times, with the most recent interventions occurring in July 2024 when the yen-dollar exchange rate breached the 160 threshold. With the yen now approaching similar levels, the market is rife with speculation about further interventions.

Indonesia has also taken measures to defend its currency. Since November 2024, the rupiah has repeatedly approached the critical threshold of 16,000 per dollar. In response, Bank Indonesia announced emergency market interventions and emphasized its commitment to maintaining market confidence. In December, the central bank kept its benchmark interest rate unchanged, prioritizing rupiah stability amid heightened global economic uncertainty driven by U.S. policy shifts and geopolitical tensions.

Looking ahead, global markets remain overshadowed by uncertainty surrounding the Federal Reserve's rate trajectory and U.S. government policies. While the consensus expects a strong dollar to persist in 2025, the continued upward movement of the dollar index may face challenges, given that much of the U.S. policy outlook has already been priced in. Short-term fluctuations are likely to draw attention.

On January 6, the dollar index dropped sharply, falling over 1%—its largest single-day decline since November 2024. This triggered a broad rebound in non-U.S. currencies, which moved off recent lows.

For 2025, the dollar is expected to maintain its dominance, driven by U.S. economic performance, investment returns, and trade policies. However, the pace of appreciation may vary. In the first half of the year, as the Fed continues rate cuts and U.S. government policies take time to fully impact inflation and growth, the dollar is unlikely to see significant gains, remaining in the strong range of 100–105.

Other currencies are likely to face ongoing pressure under the strong dollar regime. During the first half of the year, the dollar's impact on global currencies may be slightly weaker due to lingering effects of U.S. policy shifts. Investors are advised to capitalize on the dollar's strength by selling into rallies and diversifying into other currencies.

Source: Shanghai Securities News