By Karen Brettell
NEW YORK (Reuters) – The U.S. dollar hit a two-year high and was on track to post an annual gain against nearly all major currencies on Tuesday as the Federal Reserve was expected to hold interest rates higher Federal than peers direct U.S. money to control competitors.
Traders have readied for the US central bank to take a slow and cautious approach to further rate cuts next year as inflation remains above the Fed's 2% annual target.
Analysts also expect policies to be introduced by president-elect Donald Trump, including business deregulation, tax cuts, tariffs and a crackdown on illegal immigration. , to stimulate growth and add to price pressures next year.
That has sent US Treasury yields higher and the demand for US currency strengthened.
“U.S. output has adjusted higher to price in the possible impact of inflation from the incoming Trump administration's policy agenda, including tax increases, policy in- tighter migration and maintaining loose fiscal policy,” said Lee Hardman, senior currency analyst at MUFG.
That was last up by 0.41% on the day at 108.49 and earlier it reached 108.58, the highest level since November 2022. An annual gain of 7.0% is targeted.
Weaker growth prospects outside the United States and rising geopolitical tensions in the Middle East and the ongoing Russia/Ukraine war have boosted demand for the US currency this year.
The greenback is fueled by “rising growth concerns elsewhere against a backdrop of geopolitical risk,” analysts at Action (WA:) Economics said in a note.
Trading volumes were thin on Tuesday ahead of the New Year holiday on Wednesday.
The Japanese currency was among the losers this year and was on pace for its fourth annual loss against the greenback as it suffers from different interest rates between Japan and the United States.
Analysts expect the Japanese currency to finally be supported by further Fed easing and interest rate hikes by the Bank of Japan. Until then traders are watching for intervention by the Japanese authorities, having stepped in to support the currency several times this year.
The greenback was last up 0.29% at 157.28 yen and on track for an annual gain of 11.5%.
The euro fell 0.52% to $1.0353 and is on pace for an annual decline of 6.2%, with traders expecting the European Central Bank to be sharper with its cuts than the Fed.
Sterling weakened 0.34% to $1.2508 and was on course for a 1.6% fall in 2024, the strongest performance of any major currency against the dollar this year.
The Australian and New Zealand dollars both fell to two-year lows on Tuesday. This was set for a fall of around 9.2% this year, the weakest annual performance since 2018. AUD/
This was set for a decline of 11.4%, its softest performance since 2015.
In cryptocurrencies, bitcoin gained 2.07% to $93,824. It reached a record high of $108,379.28 on December 17 and is expected to gain 121% this year.
