Dollar Remains Near Two-Year High as Stocks Face Challenges

By Ankur Banerjee and Alun John

SINGAPORE/LONDON - The dollar experienced a slight decrease but remained near a two-year high against various currencies on Friday. This is largely driven by investor expectations that economic growth in the U.S. will outpace growth in other regions. Meanwhile, Chinese blue chip stocks experienced their largest weekly drop since 2022.

The dollar index, which measures the currency against a basket of six others, reached its highest level since November 2022 on Thursday, while the euro plunged to $1.02248, marking its lowest point since 2022. Both the British pound and Japanese yen also reached multi-month lows.

Although some currencies showed minor recoveries on Friday, with the euro rising 0.3% to $1.0297, the strength of the dollar continued to shape market sentiment. Kenneth Broux, head of corporate research FX and rates at Societe Generale, highlighted that "If a currency’s valuation reflects the degree of confidence in growth outlooks relative to other economies, the current situation is a damning assessment of the euro zone compared to the U.S. in 2025."

Last year, the U.S. dollar experienced a rally as investors anticipated that policies enacted by President-elect Donald Trump would enhance growth and inflation. This raised expectations for fewer rate cuts from the Federal Reserve and increased yields on U.S. Treasuries, as European central banks were expected to continue lowering rates. Although yields on U.S. Treasuries fell from their highs in December — the benchmark rate was last seen at 4.543%, down 3 basis points on the day — the dollar's upward trend persisted, fueled by concerns about growth in other areas.

Francesco Pesole, a currency analyst at ING, noted that "the implications of expected U.S. protectionism under Trump, along with rising gas prices resulting from the shutdown of Ukraine’s pipeline, are impacting investor sentiment." Currently, wholesale gas prices in Europe are among the highest in 14 months, driven by falling temperatures, reduced gas storage levels, and the end of a long-standing agreement for Russia to supply gas to Europe via Ukraine.

This scenario added pressure on European stocks, which fell by 0.26% on Friday, reversing gains from the previous day. Nevertheless, shares in oil and gas sectors rose by 0.9%. The decline in European stocks also reflected a late drop in U.S. markets on Thursday, where major benchmarks closed broadly lower. Notably, Tesla shares dropped 6.1% following the company's report of its first annual decline in deliveries.

Despite this, futures for the S&P and Nasdaq indexes were both up around 0.3% on Friday.

Concerns Over Chinese Economic Growth

Investor concerns extend to China's economic outlook as well. The country's blue chip index declined by 5.2% during the week, marking its most significant weekly loss since October 2022. Furthermore, the Chinese yuan slid past the 7.3 per dollar threshold to reach a 14-month low, influenced by lowering Chinese yields and expectations of rate cuts amid a robust U.S. dollar, coupled with potential tariffs from the incoming Trump administration.

Yield drops in the Chinese market have accelerated, as investors flock towards safer government bonds. Both ten-year and 30-year Chinese government bond yields weakened by approximately 3 basis points, hitting record lows.

In an effort to stimulate business investment and boost consumer spending, China recently announced a significant increase in funding from ultra-long treasury bonds set for 2025. However, this news failed to uplift market sentiment.

Also, despite ongoing political unrest in South Korea, shares there rebounded after five consecutive days of decline, as the recently appointed acting president committed to stabilizing the nation's financial markets.

Commodity and Gold Market Updates

In the commodities market, oil futures dipped slightly to $75.86 a barrel, while natural gas prices remained steady at $73.09. Gold prices held firm at $2,655 per ounce, following a remarkable 27% rise in 2024, making it the asset's best annual performance since 2010.

Dollar, Stocks, China