USD Strength
In December 2024, the U.S. Dollar (USD) remained strong, continuing its dominance in the forex market. The dollar index (DXY), which tracks the USD against a basket of major currencies, hovered near 107.99, close to a two-year high of 108.4. This is the result of several key factors specifically strong U.S. economic data, resilient consumer spending and robust labour market performance, underpinning confidence in the dollar. This, paired with the FED maintaining its hawkish tone, signals a cautious approach to rate cuts in 2025.
Euro Struggles
The Euro weakened against the US Dollar during the holiday season, trading near $1.0429. This was primarily due to the European Central Bank’s cautious monetary policy stance, signalling limited rate hikes or potential pauses amid slowing economic growth. Weak economic data from the Eurozone, including sluggish industrial output and persistent inflation, further dampened investor confidence. Concerns over energy costs and geopolitical instability also contributed to the Euro’s weakness.
Yen Falls Again
The Japanese Yen significantly depreciated against the US Dollar in December 2024, reaching a five-month low of 157.82. This was largely due to the Bank of Japan’s cautious monetary policy stance, contrasting with the Federal Reserve’s hawkish approach. The divergence in monetary policies, with the BoJ maintaining low interest rates while the Fed continues to raise rates, weakened the Yen. This represents a 11.5% increase in the USD against the Yen since early September lows.
2025 Market Expectations
The FX market in 2025 will be largely shaped by monetary policies, global economic conditions and geopolitical factors. Decisions from central banks, especially the Fed, ECB and BoJ, will play a crucial role in driving major currency movements. While the USD may face pressure from potential rate cuts by the Fed, it could remain strong if U.S. yields stay high. The market will likely be impacted by the policies, rhetoric and global relationships of the Trump administration. The previous tenure had a notable effect on economic and trade policies, a similar influence could be seen again. The new president’s inauguration is set for January 20, 2025.
Global economic uncertainty, particularly in China and the Eurozone, coupled with inflationary pressures, will drive currency volatility in 2025. Safe-haven currencies like the USD and JPY are likely to gain favour, while commodity-linked currencies (AUD, CAD) may benefit from a global demand recovery. The Canadian Dollar, as an oil-exporting nation, will be particularly sensitive to fluctuations in energy prices, influenced by OPEC decisions, geopolitical tensions and the transition to renewable energy.
Geopolitical tensions, including U.S.-China relations, regional conflicts and Brexit developments, will add complexity to the market. The rise of de-dollarisation discourse and the emergence of central bank digital currencies (CBDCs) will likely shape long-term currency trends.
In 2025, the FX market is set to present both challenges and opportunities, requiring traders and investors to remain agile and well-informed to successfully navigate the shifting global landscape.