Is the US dollar's strength waning? Multiple countries experience volatile exchange rates, with central bank policies becoming the key factor【This Week's Forex Watch】

Last Week’s Market Overview: US Dollar Diverges, Emerging Markets Experience Increased Volatility

Last week (December 15-19), the global foreign exchange market showed a divergence. The US Dollar Index rose slightly by 0.33%, but non-USD currencies performed variably. The euro declined by 0.23%, the Japanese yen depreciated by 1.28% to a recent low, the Australian dollar fell by 0.65%, while the British pound slightly increased by 0.03%. Notably, Asian currencies such as the yen and Thai baht faced downward pressure, indicating that emerging markets are under the impact of US dollar appreciation.

Euro Gains Then Falls, Fed Rate Cut Expectations Become a Variable

Divergence in Central Bank Policy Directions

Last week, the EUR/USD movement was a classic “rise then fall.” The European Central Bank (ECB) maintained interest rates as expected, but President Lagarde’s dovish stance disappointed the market, failing to provide the hawkish signals previously anticipated.

Meanwhile, US economic data showed mixed signals. November non-farm payrolls were average, and the November CPI reading was below market expectations. However, investment banks like Morgan Stanley and Barclays warned that these data are significantly affected by technical distortions and statistical biases, making it difficult to accurately reflect the true economic trend.

Fed Rate Cut Path Full of Uncertainty

According to CME FedWatch data, the market currently expects the Fed to implement 2 rate cuts by 2026, with a 66.5% probability of a cut in April. However, this expectation remains highly uncertain.

Danske Bank remains optimistic about the euro outlook. The bank’s analysis suggests that as the Fed begins a rate-cut cycle while the ECB maintains its policy, the real interest rate differential after inflation adjustment will narrow, supporting euro appreciation. Additionally, the recovery of European asset markets, hedging against dollar depreciation risks, and declining confidence in US financial institutions could further boost the euro.

Key Focus This Week

This week, attention will be on the US Q3 GDP final figures and developments in geopolitical tensions. If GDP data surpass expectations, it will be bullish for the dollar and pressure the EUR/USD. Technically, EUR/USD remains above multiple moving averages, and a short-term rally to the previous high around 1.18 is possible; if it pulls back, watch the 100-day moving average support at 1.165.

Yen Depreciation Breaks Key Levels, Intervention Risks Emerge

Policy Dilemmas Behind the Yen’s Sharp Depreciation

Last week, USD/JPY surged by 1.28%, approaching the critical 158 level. The main reason is Japan’s “dovish rate hike” combination. Although the Bank of Japan (BOJ) raised interest rates by 25 basis points as scheduled, Governor Ueda’s dovish comments clearly signaled a lack of firmness, causing market doubts about the policy stance.

Adding fuel to the fire, Prime Minister Suga’s cabinet approved a massive fiscal stimulus package totaling 18.3 trillion yen. This huge expenditure directly diluted the tightening effect of rate hikes, completely breaking investor expectations of yen appreciation.

Diverging Forecasts and Rising Intervention Risks

Regarding future trends, major institutions hold divergent views. Sumitomo Mitsui Banking Corporation predicts the next rate hike will be delayed until October 2026, with the yen depreciating to 162 in Q1 2026.

Conversely, J.P. Morgan issued a warning: if the yen depreciates beyond 160 in the short term, it will be classified as a sharp exchange rate fluctuation, significantly increasing the likelihood of government intervention. This is a risk that markets need to take seriously.

In contrast, Nomura Securities believes that under the backdrop of Fed rate cuts, the US dollar will face continued depreciation, making further yen depreciation difficult. The bank forecasts the yen exchange rate will appreciate to 155 in Q1 2026.

Key Focus This Week

This week, Ueda’s speeches and verbal interventions by Japanese authorities will be critical. Hawkish comments or escalation of intervention could push USD/JPY lower. From a technical perspective, USD/JPY has broken above the 21-day moving average, and the MACD shows a buy signal. Breaking through the 158 resistance could open larger upside space. Conversely, if it remains pressured below 158, the risk of a pullback increases, with support at 154.

Emerging Markets Dynamics: Thai Baht Under Pressure

It is worth noting that, against the backdrop of US dollar appreciation, the Thai baht also faces depreciation. The general weakening of Asian emerging market currencies reflects a trend of global capital flowing into the dollar, posing challenges to financial stability in countries like Thailand that rely heavily on foreign investment.