Dollar drifts ahead of Trump's return to the White House

British Pound

Reuters: The pound dropped against the dollar and euro on Friday, after data showed that British retail sales fell unexpectedly in December, adding to an already-gloomy economic outlook. Retail sales, adjusted for the inclusion of the Black Friday sales at the start of the month, fell by 0.3% month-on-month in December after a downwardly revised 0.1% expansion in November, the Office for National Statistics said. Economists polled by Reuters had forecast a monthly increase in retail sales of 0.4%.

The pound fell 0.3% against the dollar to $1.2197, not far from the 14-month low it touched on Monday. Traders added to their bets on Bank of England rate cuts after the figures, and now price in 66 basis points in cuts during 2025.

This compares to the 42 bps of rate cuts investors expect from the U.S. Federal Reserve this year. A strong U.S. economic outlook, along with investor views that policies expected of President-elect Donald Trump could increase price pressures, has boosted the greenback against other major currencies.

Concerns about the UK's fiscal outlook put additional pressure on the British pound and bond prices last week. The pound, last year's best performing G10 currency against the dollar, has lost 2.4% so far this year. The euro, on the other hand, has only fallen 0.5% against the dollar, and gained 2% over the pound, even as investors price in over 95 bps in rate cuts from the European Central Bank in 2025. While yields on UK government bonds, so-called gilts, have since fallen back from their recent highs, the challenges facing British finance minister Rachel Reeves linger.

"Fundamentally, the UK continues to grapple with a stagnating economy, along with sticky price pressures – a grim combination," said Michael Brown, strategist at Pepperstone. The British economy grew more slowly than expected in November, data showed on Thursday. Investors are hunkering down for a stretch of losses as ructions in the pound, government bonds and stocks feed on each other and put Britain at risk of a wave of hedge fund attacks. "It's difficult to see really how things are going to turn around from here," said Fiona Cincotta, senior market analyst at City Index, highlighting that a large proportion of retailers were looking to pass on costs from a higher tax burden.

Two-thirds of British retailers will raise prices this year in response to higher employer social security costs introduced in the new Labour government's first budget, a survey of finance chiefs showed on Wednesday. "We're looking really at this stagflationary outlook. And we're seeing that reflected in the weak pound," Cincotta said. The euro rose 0.3% against the pound on Friday to 84.42 pence.

US Dollar

Reuters: The dollar was on the defensive at the start of a pivotal week on Monday as Donald Trump returns to the White House, with his inauguration speech later in the day the primary focus for investors hoping to decipher his immediate policies. The Japanese yen strengthened in Asian hours, clinging to a one-month high hit last week, as traders wager the Bank of Japan will hike its policy interest rate this week. Still, trading is likely to be thin with U.S. markets closed. Investors are also keeping an eye on Middle East developments after Hamas released three Israeli hostages and Israel released 90 Palestinian prisoners on Sunday, the first day of a ceasefire suspending a 15-month-old war.

Cryptocurrency investors remain in party mode awaiting executive orders from Trump aimed at reducing regulatory roadblocks and promoting widespread adoption of digital assets. Trump courted crypto campaign cash promising to be a "crypto president" and launched a digital token on Friday, which soared above $70 at one point for a market value north of $15 billion. It was last trading around $42, CoinMarketCap showed. Bitcoin, the world's best known cryptocurrency, was slightly weaker at $101,434 on Monday. It has surged 80% since the U.S. election in early November touching record high in December.

The spotlight is firmly on the policies Trump will enact on his first day in office. At a rally a day before, Trump said he would impose severe limits on immigration. Goldman Sachs strategists expect U.S. policy changes to add to the case for dollar strength but cautioned of some near-term risks given the market's expectation for quick action on tariffs. Instead, Goldman strategists anticipate a series of headline-grabbing news over time on tariffs, similar to Trump's first presidency.

"We think the storm is just rolling in. We expect it will pay to be patient." The dollar index, which measures the U.S. currency against six peers, was 0.16% lower at 109.16 but remained close to the 26-month high of 110.17 touched last week. The index has risen 4% since the election as traders expect Trump's policies to boost growth but be inflationary, requiring interest rates to stay higher for longer. The euro advanced 0.26% to $1.029775 but still near a two-year low touched last week as tariff threats weigh. Sterling rose 0.27% to $1.2201.

Thierry Wizman, global foreign exchange and interest rates strategist at Macquarie, said when it comes to tariffs, traders are in a "wait-and-see" mode at best and, at worst, have been largely unwilling to give disinflation in the U.S. the benefit of the doubt. "That means that any renewed mention of tariffs is likely to send the USD higher, as well as bond yields." Last week's slightly cooler core inflation data, dovish comments from Federal Reserve Governor Christopher Waller and reports of tariffs being introduced gradually have led traders to price in the prospect of two interest rate cuts this year.

Markets are now pricing in 42 basis points of easing in 2025. The shifting expectations weighed last week on the dollar which clocked its first week of decline in seven. The yen was last at 156.18 per dollar, not far from the one-month high of 154.98 touched on Friday, with sources telling Reuters the BOJ was likely to raise its policy interest rate this week barring market shocks when Trump takes office. Governor Kazuo Ueda and his deputy said last week the central bank will debate whether to hike, signalling an intention to take borrowing costs higher at a Jan. 23-24 policy meeting unless Trump's inaugural speech upends markets.

HSBC's chief Asia economist Fred Neumann said economic data in Japan suggests that monetary policy normalization is certainly warranted this year. The BOJ should have raised rates in December, said Neumann at HSBC's outlook event in Singapore. "So we think it's now good to do this hike rates,"

South African Rand

Reuters: South Africa's rand gained on Friday after a turbulent week, as investor focus shifted towards U.S. President-elect Donald Trump's inauguration on Monday. At 1524 GMT, the rand traded at 18.71 against the U.S. dollar, about 0.6% stronger than its previous close. Data out of the U.S. this week showed a sturdy labour market and sticky inflation, and uncertainty over the potential impact of Trump's tariffs and tax plans has led the U.S. Federal Reserve to project two interest rate cuts this year.

However, Fed Governor Christopher Waller said on Thursday three or four rate cuts are still possible if economic data weakens further. "Looking ahead, investors should closely monitor January 20, 2025, when President-elect Donald J. Trump is set to begin his second term," said Matthew Liversage, trading services dealing specialist at IG. "Volatility is expected in the coming week as investors adjust their positions ahead of the market close or hold cash in anticipation of developments early next week."

On the stock market, South Africa's blue-chip Top-40 index closed about 1.3% up. Its benchmark 2030 government bond was little changed, with the yield at 9.21%.

Global Markets

Reuters: The dollar was firm and Asia's stock markets were cautiously positive on Monday as investors waited for an expected flurry of policy announcements in the first hours of Donald Trump's second presidency and eyed a rate hike in Japan at the end of the week. Trump takes the oath of office at noon Eastern Time (1700 GMT), and promised a "brand new day of American strength" at a rally on Sunday. He has stoked expectations he will issue a slew of executive orders right away and, in a reminder of his unpredictability, launched a digital token on Friday, which soared to trade above $70 at one point for a total market value north of $15 billion.

Monday is a U.S. holiday, so the first responses to his inauguration in traditional financial markets may be felt in foreign exchange, where traders are focused on Trump's tariff policies, and then in Asian trade on Tuesday. U.S. equity futures were a fraction weaker in the Asian morning on Monday while the dollar, which has rallied since September on strong U.S. data and as Trump's ultimately successful political campaign gained momentum, held steady. Japan's Nikkei rose 1%. Last week the S&P 500 notched the biggest weekly percentage gain since early November and the Nasdaq its largest since early December on some benign inflation data.

The dollar is up nearly 14% on the euro since September and at $1.0273 is not far from last week's two-year high. But so much is priced in that some analysts feel a more gradual start to U.S. tariff hikes may draw out some sellers. "A forceful start to Trump's new term could rattle nerves and give the dollar more support," said Corpay currency strategist Peter Dragicevich. "By contrast, based on what already looks baked in, we think a more measured approach may ease fears and see the dollar lose ground, as it did after Trump took charge in 2017."

Trump has threatened tariffs of as much as 10% on global imports and 60% on Chinese goods, plus a 25% import surcharge on Canadian and Mexican products, duties that trade experts say would upend trade flows, raise costs and draw retaliation. The Canadian dollar touched a five-year low of C$1.4486 per dollar on Monday. The Mexican peso hit a 2-1/2 year low of 20.94 per dollar on Friday. Bitcoin dipped in the early part of the Asian day but remained above $100,000. Benchmark 10-year Treasury yields closed out Friday at 4.61%, up nearly 100 basis points in four months.

China is in focus as the target of the harshest potential trade levies. Investors lately cheered better-than-expected Chinese growth data and a Friday phone call between Trump and Chinese President Xi Jinping that left both upbeat. "Basically everyone is waiting for these trade negotiations to begin and see what kind of attitude Xi Jinping takes with Trump," Ken Peng, head of Asia investment strategy at Citi Wealth told reporters in Singapore at an outlook briefing. "That relationship between the two gentlemen has become very important as a leading indicator of policies." Chinese equity markets rose last week and futures pointed to modest gains for Hong Kong shares at the open.

The yuan is seen likely to slowly adjust to any shifts in trade policy and was marginally firmer at 7.3355 per dollar in offshore trade. The Australian dollar, sensitive to trade flows and China's economy, has scraped off five-year lows and, according to Commonwealth Bank strategist Joe Capurso, could test resistance at $0.6322 if Trump's policy changes fall short of market expectations. It was last at $0.62. Japan's yen rallied last week as remarks from Bank of Japan policymakers were taken as hints that a rate cut is likely on Friday. It was last steady at 156.17 per dollar and rates markets priced about an 80% chance of a 25 basis point rate hike. In commodities gold hovered at $2,694 an ounce and Brent crude futures ticked higher to $81.21 a barrel.

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