Forex Today: US Dollar rally pauses ahead of Manufacturing PMI data
Here is what you need to know on Friday, January 3:
The US Dollar (USD) gathered strength to start the new year as trading conditions normalized following the holiday season. The US economic calendar will feature the ISM Manufacturing Purchasing Managers Index (PMI) data for December later in the day. Investors will also keep a close eye on comments from central bank officials.
US Dollar PRICE This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the British Pound.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 1.36% | 1.44% | -0.31% | -0.14% | 0.07% | 0.45% | 0.94% | |
| EUR | -1.36% | 0.07% | -1.70% | -1.53% | -1.35% | -0.94% | -0.47% | |
| GBP | -1.44% | -0.07% | -1.75% | -1.60% | -1.42% | -1.02% | -0.54% | |
| JPY | 0.31% | 1.70% | 1.75% | 0.18% | 0.45% | 0.93% | 1.35% | |
| CAD | 0.14% | 1.53% | 1.60% | -0.18% | 0.20% | 0.66% | 1.07% | |
| AUD | -0.07% | 1.35% | 1.42% | -0.45% | -0.20% | 0.41% | 0.90% | |
| NZD | -0.45% | 0.94% | 1.02% | -0.93% | -0.66% | -0.41% | 0.48% | |
| CHF | -0.94% | 0.47% | 0.54% | -1.35% | -1.07% | -0.90% | -0.48% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
The USD Index gained more than 0.7% on Thursday and reached its highest level since November 2022 above 109.50. Early Friday, the index retreats toward 109.00. The risk-averse market atmosphere helped the USD outperform its rivals on the first trading day of the year. Additionally, the data published by the Department of Labor showed that the weekly Initial Jobless Claims declined to 211,000 from 220,000 in the previous week, further supporting the USD.
During the Asian trading hours, the People's Bank of China (PBOC) said that it is likely to cut interest rates from the current level of 1.5% "at an appropriate time" in 2025. "The PBOC will pay more attention to the role of interest rate control and improve the formation and transmission of market-orientated interest rates," the PBOC added. Meanwhile, the National Development and Reform Commission (NDRC), China’s state planner, said in a statement on Friday that it is “fully confident in achieving continued economic recovery in 2025.” Following Thursday's sharp decline, Hong Kong's Hang Seng Index is up around 0.5% on the day, while Shanghai Composite Index is down 1.5%. After posting small gains on Thursday, AUD/USD continues to edge higher and was last seen trading above 0.6200.
In the meantime, US President-elect Donald Trump reiterated his willingness to ramp up tariffs. "The tariffs, and tariffs alone, created this vast wealth for our country," Trump said on X. "Then we switched over to income tax. We were never so wealthy as during this period. Tariffs will pay off our debt and make America wealthy again." In the European morning on Friday, US stock index futures trade marginally higher and the 10-year US Treasury bond yield holds comfortably above 4.5%.
EUR/USD lost nearly 1% on Thursday and slumped to its weakest level in over two years below 1.0250. The pair corrects higher but remains below 1.0300 in the European morning on Friday.
GBP/USD dropped to its lowest level since April near 1.2350 on Thursday, pressured by the persistent USD strength. The pair holds its ground early Friday and trades near 1.2400.
USD/JPY registered small gains on Thursday but lost its traction early Friday. At the time of press, the pair was fluctuating in a tight channel above 157.00.
Gold benefited from the risk-averse atmosphere and rose more than 1% on Thursday. XAU/USD struggles to build on its recent gains but holds comfortably above $2,650.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
(This story was corrected on January 3 at 08:15 GMT to say that EUR/USD remains below 1.0300 in the European morning, not 1.2300).
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
