The US dollar remains strong, with divergence in monetary policies among many central banks intensifying — Weekly review of the foreign exchange market

Major Divergence in Non-USD Currencies, US Dollar Index Hits New High

Last week (12/15-12/19), the US Dollar Index rose by 0.33%, continuing its strong momentum. Meanwhile, the performance of non-USD currencies showed significant differences. In Europe, the euro faced pressure, declining 0.23% for the week; in the Asia-Pacific region, the yen depreciated the most, with a weekly drop of 1.28%; additionally, the Australian dollar fell by 0.65%, while the British pound remained slightly up, gaining 0.03% for the week.

Euro Faces Dilemma, Fed Policy Direction Still Uncertain

EUR/USD showed a “gap up then decline” trend last week, ultimately closing down 0.23%. The European Central Bank maintained its interest rate policy as expected, but President Lagarde’s remarks were relatively cautious, failing to meet market expectations for hawkish signals.

US economic data presented a “mixed picture.” November non-farm payrolls underperformed expectations, while CPI year-over-year growth was below market forecasts. Several investment banks, including Morgan Stanley and Barclays, pointed out that these data might be affected by seasonal adjustments and statistical fluctuations, making it difficult to accurately reflect economic trends.

Based on current market pricing, the Fed is still expected to cut interest rates twice by 2026, with the probability of a rate cut in April priced at 66.5%. However, whether this outlook can be realized depends on subsequent CPI and employment data.

DANSKE Bank believes that, against the backdrop of the Fed starting a rate-cut cycle while the European Central Bank keeps rates unchanged, the inflation-adjusted real interest rate differential between the US and Europe may narrow, which would be favorable for euro appreciation. Additionally, the recovery of European assets, increased hedging demand against dollar risks, and rising concerns over US policy prospects could all serve as catalysts for euro gains.

Key indicators this week: US Q3 GDP revision and geopolitical developments. If GDP data surpass expectations, it will further strengthen the dollar and pressure EUR/USD; otherwise, it will be positive for the euro. Technically, EUR/USD remains above major moving averages, with resistance at the previous high of 1.18, and support around the 100-day moving average near 1.165.

Yen Depreciation Accelerates, Government Intervention Risks Rise

USD/JPY surged by 1.28% last week, primarily due to Japan’s contradictory policy mix of “dovish rate hikes.” The Bank of Japan raised its policy rate by 25 basis points as scheduled, but Governor Ueda’s tone was relatively dovish, surprising the market. More critically, Japan’s new government approved a fiscal stimulus package totaling 18.3 trillion yen, which effectively offset the tightening effect of the rate hike.

Market expectations are that the BOJ will only cut rates once in 2026, and Sumitomo Mitsui Banking Corporation predicts the next rate hike window will open in October 2026. Given the distant timing, the bank believes the yen could further depreciate to around 162 in Q1 2026.

However, JPMorgan warns that if USD/JPY breaks above 160 in the short term, it will be classified as a sharp exchange rate fluctuation, significantly increasing the likelihood of official intervention by the Japanese government. In contrast, Nomura Securities remains relatively optimistic, believing that under the Fed’s rate cut environment, the dollar will weaken long-term, and the yen is expected to gradually appreciate, with a forecast of 155 in Q1 2026.

Focus this week: Policy signals from BOJ Governor Ueda and Japan’s government verbal interventions. If official statements turn more hawkish or intervention escalates, USD/JPY could retreat. From a technical perspective, the pair has broken above the 21-day moving average, with MACD showing a buy signal. If it can break through resistance at 158, further upside may open; conversely, if it faces resistance below 158, the risk of a pullback increases, with support around 154.

AUD Under Pressure, RMB Exchange Rate Fluctuations to Be Closely Monitored

The Australian dollar fell by 0.65% last week, underperforming other G10 currencies. The AUD/RMB exchange rate also experienced adjustments, impacting China-Australia trade and cross-border investment. Investors should continue to monitor technical and macroeconomic developments in the AUD, especially China’s economic data and commodity prices.

Overall, this week’s forex market will seek balance amid expectations for Fed policy, geopolitical changes, and central bank speeches. Investors should pay close attention to official information and key technical breakout levels.