Dollar index climbs above 108 on strong economic data

The dollar index surged above 108.2 on Friday, as strong economic data reinforced market expectations that the Federal Reserve will maintain higher interest rates for an extended period.

Dollar index climbs above 108 on strong economic data

The core PCE price index, which is the Fed's preferred inflation measure, rose by 0.2% in December and 2.8% year-over-year, matching forecasts and signaling that inflationary pressures remain steady. Additionally, personal consumption expenditures jumped by 0.7%, surpassing the 0.5% estimate, highlighting strong consumer spending. However, labor cost growth moderated, slowing to its weakest pace since 2021, providing some signs of easing inflationary pressures in the labor market.

Fed pause may last

The Federal Reserve, in its latest meeting on Wednesday, opted to keep rates unchanged, with Chair Jerome Powell reiterating the need for more evidence of progress toward the central bank's 2% inflation target before any rate cuts are considered. This cautious stance, alongside robust economic data, has bolstered expectations that the Fed will maintain its higher-for-longer interest rate policy for the foreseeable future, which in turn has supported the dollar's strength.

Eyes on Trump's moves

Meanwhile, traders are also closely monitoring US President Donald Trump's trade policies. He reaffirmed his plans to impose 25% tariffs on Mexico and Canada, adding further uncertainty to international trade dynamics, while a 10% tariff on Chinese imports remains under review. Investors are eagerly awaiting more clarity on these policies, as they could have significant implications for the global economy and the dollar's performance.

Pressure against the Japanese yen

Despite the dollar's strength this week, it may face some pressure against the Japanese yen, with expectations of tighter monetary policy from the Bank of Japan helping to support the yen. As the market continues to digest the Fed's monetary stance and Trump’s trade moves, the dollar is on track to close the week with gains against most major currencies, but its performance could vary depending on future developments in both US domestic policy and international trade relations.