The dollar is on track for its best week of the month, according to Reuters

By Karen Brettel

NEW YORK (Reuters) – The dollar fell on Friday but was on track for its strongest weekly performance in a month on expectations that the U.S. economy will outpace global peers this year and that U.S. interest rates will remain relatively high.

A still-strong labor market and stubbornly high inflation have pushed Treasury yields higher in recent weeks and boosted demand for the US dollar.

New policies under the incoming Donald Trump administration, including trade deregulation, tax cuts, anti-immigration and tariffs, are expected to boost growth and increase price pressures.

It ended the day up 0.28% at 108.91, after hitting a two-year high of 109.54 on Thursday. It is on the right track to earn a weekly profit of 0.85%.

Despite the dollar’s recent gains, there is still considerable uncertainty about when new US government policies will be enacted and what their ultimate impact will be. This could put the dollar’s rally on hold in the near term.

All of these proposed tariffs because we’ll see a small dollar return when the administration comes in – they’ll take some time to implement and we don’t know if all of these proposals will happen. It’s implemented or it’s not implemented,” said Helen Given, an FX trader at Monex USA in Washington.

“I think we’ll see some more dollar strength as we go through the second half of this calendar year,” Given said.

Data on Friday showed the dollar pared short-term losses as US manufacturing neared a recovery in December, with production rebounding and new orders rising further.

The euro faces a weak growth outlook and could be hurt by US tariffs, with the European Central Bank expecting more rate cuts than the Federal Reserve this year.

Traders are less likely to expect a rate cut of 100 basis points by the ECB by year-end and a 50 rate cut by the Fed.

Uncertainties, including France’s budget fight and Germany’s election, are also weighing on the single currency.

The euro was up 0.39% at $1.0305.

Sterling rose 0.41% to $1.2431. It was on track to lose roughly 1.15% for the week, the most since early November.

The dollar fell 0.26% to 157.11 Japanese yen, below a five-month high of 158.09, reached in December.

The Japanese currency has suffered from a wide interest rate differential between the US and Japan, with the Bank of Japan’s caution about additional rates adding further pain to the yen.

China hit its weakest level in a year at 7.3199 against the dollar as falling output and expectations of further domestic devaluation weighed on the currency.

Cryptocurrency Bitcoin gained 1.59% to $98,658.