It’s Christmas today, and the US dollar is taking center stage in the forex market, handing out gains while other currencies struggle.
The greenback has seized on the low trading volumes and thin liquidity typical of the holiday season, pressuring the euro below $1.04. This marks its second straight day of gains against the euro, underscoring its dominance.
Being bullish on the euro has been a losing battle this year, but the final quarter has been particularly punishing. For the past three months, EURUSD has shed 7% of its value.
The decline began right after the euro peaked at a 2024 high of $1.12. Much of the blame lies with the European Central Bank, which implemented aggressive interest rate cuts to revive a stagnating eurozone economy. These cuts have weighed heavily on the euro, and the outlook remains bleak as the ECB signaled more reductions to come. Lower interest rates typically weaken a currency, and the ECB has downplayed inflation concerns, planning at least two additional rate cuts in upcoming meetings.
Heading into the new year, the euro’s growth prospects are dim, as the ongoing rate cuts are expected to keep its valuation under pressure.
The euro isn’t the only currency that has been bruised by the dollar. The Japanese yen has also suffered significant losses. Twice this year, the dollar surged more than 12% against the yen. The first rally in July pushed USDJPY to a multi-decade high of ¥162.00. In response, Japanese officials intervened, spending billions to prop up the yen, temporarily reversing the dollar’s gains.
However, the dollar regained its footing and began this holiday week on the rise again, climbing to ¥157.25.
The Bank of Japan has been reluctant to hike interest rates, making just one small hike in late July. Japan’s economy has struggled with two quarters of contraction and only one period of modest growth this year. This hesitation to increase rates has weakened the yen, allowing the dollar to capitalize on the situation and further extend its dominance.
As the year comes to a close, the dollar has cemented its status as the king of the forex market, outpacing its major rivals and showing no signs of slowing down.
