Dollar Remains Close to Two-Year High as Stocks Face Challenges

By Ankur Banerjee and Alun John

SINGAPORE/LONDON - The U.S. dollar has seen a slight decline but is still near a two-year high against several other currencies on Friday. This trend comes as investors anticipate that the economic growth gap between the United States and other countries will continue to widen. Meanwhile, Chinese blue-chip stocks have experienced their most significant weekly drop since 2022.

The dollar index, which measures the currency's performance against six other major currencies, reached its peak since November 2022 on Thursday. During this time, the euro fell to $1.02248, marking its lowest level since 2022, while the British pound and Japanese yen also hit multi-month lows.

Although some currencies managed to recover slightly on Friday—the euro saw an increase of 0.3% to $1.0297—the prevailing strength of the dollar influenced market sentiment. "If a currency’s value reflects confidence in the growth outlook compared to other economies, it paints a dire picture for the euro zone’s prospects relative to those of the U.S. in 2025," noted Kenneth Broux, head of corporate research for FX and rates at Societe Generale.

The rise of the U.S. dollar began late last year when investors speculated that President-elect Donald Trump's policies would stimulate growth and inflation. This led to expectations of fewer rate cuts from the Federal Reserve and increasing yields on U.S. Treasuries while European central banks anticipated further rate reductions.

Despite a slight reduction in U.S. Treasury yields from their December highs—currently around 4.543%, down 3 basis points—concerns about slower growth in other nations continue to support the dollar's value. "In addition to the expected implications of U.S. protectionism under Trump, pressure is also being created by rising gas prices due to the shutdown of Ukraine's pipeline," explained Francesco Pesole, currency analyst at ING.

In Europe, wholesale gas prices have surged to their highest levels in 14 months due to colder temperatures, decreasing gas reserves, and the expiring gas supply agreement with Russia. This has added to the difficulties for European equities, which fell by 0.26% on Friday, reversing the gains made the previous day, even as oil and gas shares saw a slight increase of 0.9%.

The decline in European stock markets was partly a reaction to a late Thursday drop in U.S. benchmarks, where shares of Tesla plummeted by 6.1% after reporting its first annual decline in deliveries.

On a positive note, futures for the S&P 500 and Nasdaq were both up about 0.3% on Friday, suggesting some resilience.

Concerns Over China

Investor worries surrounding China's economic situation are also prevalent. This week, the blue-chip index in China dropped by 5.2%, marking its worst weekly performance since October 2022.

Moreover, the Chinese yuan fell past the 7.3 per dollar threshold, hitting a 14-month low. This decline has been influenced by weakening Chinese yields, expectations for rate cuts in light of a strong dollar, and potential tariffs from the incoming Trump administration.

As investors sought security in government bonds, yields on ten-year and thirty-year Chinese government bonds dropped about 3 basis points, reaching all-time lows.

Despite efforts from the Chinese government to boost business investment and consumer spending by increasing funding through ultra-long treasury bonds in 2025, the market's mood remained largely unaffected.

In South Korea, shares have rallyed after five days of decline, despite ongoing political instability. The country's newly appointed acting finance minister has pledged to stabilize financial markets.

In the commodities market, oil futures eased slightly to $75.86 a barrel while another measure remained steady at $73.09. Gold prices stayed firm at $2,655 per ounce, following a remarkable 27% increase in 2024—its best annual performance since 2010.

Dollar, Stocks, China