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- The US dollar has soared to its highest level in over two years amid a hawkish Fed.
- The euro has crashed as concerns about the health of the economy continue.
- The Canadian dollar has imploded as the political uncertainty continued.
- The Brazilian real has stabilized after the central bank’s intervention.
- The Chinese yuan has crashed, mirroring the performance of other emerging market currencies.
US dollar surge gains steam
The US dollar continued its strong rally, reaching its highest level since November 2022 as investors embraced a risk-off sentiment. It surged against all developed world country currencies like the euro, sterling, and Swiss franc.
The index has jumped as investors maintain their bullish view on the US economy, which is doing fairly well. The stock market is thriving, leading to increased inflows from foreign investors. Key sectors like energy are doing well, with the US being the biggest oil and gas producer in the world.
On the other hand, top countries are not doing well. China’s government has implemented substantial stimulus to reboot its economy, while the central bank is expected to start cutting interest rates. Europe is expected to continue stagnating this year as energy prices and tariff threats loom.
The US dollar index may continue rising ahead of Donald Trump’s inauguration later this month. He has pledged to implement an ambitious agenda that will lead to higher inflation, forcing the Fed to embrace a more hawkish tone. For example, he has pledged to cut taxes, deport millions, and increase tariffs.
The next key catalyst for the US dollar index will be the US nonfarm payroll (NFP) data. Economists expect the data to show that the unemployment rate remained at 4.2% as the economy added over 154k jobs.
Euro crash continues
The euro continued its downward trend last week. The EUR/USD pair has fallen in the last five consecutive weeks, moving to the lowest level since November 2022. It has plunged by over 8.13% from its highest point since August 19.
The EUR/GBP pair has also continued its strong downtrend and moved to 0.8200, its lowest level since May 2022.
This downtrend is mostly because the European Central Bank (ECB) has been highly dovish as it seeks to prevent a recession. Recent data shows that key countries that power the European economy, like Germany were not doing well.
For example, the German manufacturing sector has remained under pressure, with top companies like Volkswagen and BASF have continued to struggle. In France, luxury brands like Kering and LVMH are seeing softer demand overseas.
Therefore, the EUR/USD and EUR/GBP have dropped as investors move from the lower yielding euro to the dollar and sterling.
Canadian dollar slump continues
The USD/CAD exchange rate has continued soaring and moved to its highest level since March 2020. It has risen in the last six consecutive weeks. One reason is that Canadian political tensions have continued to rise, with Justin Trudeau’s future as the prime minister remaining in peril.
At the same time, oil and gas prices have dropped, hurting Canada’s biggest export products since it is the fourth-biggest oil producer. There are also signs that the economy is not doing well, which has forced the Bank of Canada to deliver several large interest rate cuts.
The Canadian dollar will react to the upcoming jobs numbers. Analysts expect these numbers to reveal that the unemployment rate remained at 6.8% in December as the country created over 24.5k jobs.
Brazilian real stabilizes after rout
The Brazilian real, which was the worst-performing emerging market currency in 2024, stabilized after the country’s central bank intervened. It crashed by 21% in 2024, lagging behind key currencies like the Mexican peso, South Korean won, and the New Zealand dollar.
The currency plunged as investors remained concerned about the soaring budget deficit, which was much higher than expected. The central bank has intervened by pumping liquidity to the market and increasing interest rates. It has hiked rates three times, bringing them to 12.25%, and hinted that more were coming.
Higher interest rates are meant to boost a currency by making local assets like savings more attractive. In a note, an analyst at Standard Chartered said:
Brazil’s high rates and relatively cheap valuations could provide some support, but it’s difficult to reverse the course absence of greater market confidence for the fiscal sustainability.ING Analysts
Chinese yuan continues its slump
The USD/CNY exchange rate has continued its surge and is nearing its all-time high as investors maintain their caution against the Chinese economy. It rose to a high of 7.3200, its highest point since September 23.
The yuan is plunging as concerns about tensions between the US and China. Trump campaigned for toughness in China and appointed hawks to his cabinet. As such, there are odds that the country’s recovery will be affected as tensions escalate. In a note, Bloomberg said:
With its economy hobbled by excessively high debt, deflation, and a real estate crisis, China is in a more perilous state than in 2018, when Trump first hauled out his tariff bazooka.Bloomberg
There are also signs that China’s economic recovery is taking longer to happen even after Beijing implemented substantial stimulus.
The Chinese yuan crash mirrors that of other emerging market currencies like the Indian rupee and Brazilian real.
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