King Dollar Continues to Hold Court in the Currency Market

As 2025 kicks-off, the USD continues to ‘hold court’ in the currency market. Doubts surrounding the Fed’s ability to keep cutting interest rates against a backdrop of potentially inflationary policies from the incoming administration has caused treasury yields and the US Dollar to ascend and enter 2025 on a firm footing. The Dollar Index (DXY), supported by expectations of pro-growth and therefore pro-inflationary policies such as tax cuts and deregulation, as well as the potential for trade wars which may inhibit the Fed’s ability to return interest rates to a more neutral setting, continues to make ground to the north with yield differentials in favour of the greenback. The DXY was trading at around 108.50 to start 2025, with the 110-level shaping as a potential near-term target unless soft economic indicators change the current hawkish-Fed expectations from the market.

Gold remains subdued in the face of ongoing USD strength to start the new year. The spot price was trading around the $2622 level during Asian trading hours on Thursday, with the elevated USD and treasury yield levels making things difficult for the precious metal when it comes to gains of any significance. In terms of key levels to watch this week for spot gold, moderate support sits at $2609 ahead of $2594. On the topside, resistance at $2635 would need to be cleared to open a path to $2650. Gold may be reliant on the USD taking a step backwards for this to happen unless safe haven flows pick-up.

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Oil ended 2024 at price levels close to where it started the year at, however the price of crude has had a decent run since the start of December. Over the last month, WTI oil has gained approximately 4.8% despite the stronger USD (which makes oil more expensive to purchase for those holding currencies other than the USD). Delayed OPEC production cuts have helped the crude price weather the effects of the higher Dollar, in addition to hopes for Chinese stimulus in 2025. US crude was seen trading at $71.73 on Thursday, with support levels at $70.97 and $70.33, with resistance at $72.10 and $72.55.

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This week on the economic calendar we will be watching for US jobless claims and US crude oil inventories data, as well as US ISM Manufacturing PMI data. The US Manufacturing sector exhibited weakness throughout much of 2024 and expectations are that we will see another sub 50 reading (with the 50 level being what separates expansion from contraction) when the numbers are released on Friday. It remains to be seen if any softness on the US jobs or manufacturing front can take momentum away from the USD.

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