By Karen Brettell
NEW YORK (Reuters) – The dollar fell on Friday but was on track for its strongest week-to-month performance on expectations that the U.S. economy will continue to outperform its global peers this year and that U.S. interest rates will remain high.
An already tight labor market and a strong rise in inflation have pushed up Treasury yields in recent weeks and boosted demand for US funds.
New policies under the incoming administration of Donald Trump, including deregulation, tax cuts, curbs on illegal immigration and tariffs, are also expected to boost growth and add to price pressures.
The latter was down 0.28% on the day at 108.91, after hitting a two-year high of 109.54 on Thursday. It is on track for a weekly gain of 0.85%.
Despite the dollar's recent gains there is still great uncertainty about when the policies will be introduced by the new US government, and what their impact will be. That could halt the dollar's rally in the near term.
“It is possible that we will see a pullback of the dollar as the administration comes in because all these proposed payments – it will take time to implement and we do not really know if all these proposals will be implemented or not,” said Helen Given, FX trader at Monex USA in Washington.
“As we go into the second half of this year I think we're going to see some strength in the dollar,” Given said.
The dollar briefly gave up losses after Friday's data showed that US manufacturing is close to recovering from December, with output doubling and new orders rising further.
The euro faces a weak growth outlook and may be hurt by US taxes, and the European Central Bank is expected to cut rates more than the Federal Reserve this year.
Traders are pricing in a 100 basis point ECB rate cut at the end of the year, and only less than a 50 basis point Fed rate cut.
Uncertainties including France's budget battle and the German election are also weighing on the single currency.
The euro was up 0.39% at 1.0305 dollars but it was referring to a 1.22% weekly decline, the worst since the beginning of November.
Sterling gained 0.41% to $1.2431. It was on track to lose 1.15% for the week, the most since early November.
The dollar slid 0.26% to 157.11 Japanese yen, holding below a five-month high of 158.09, reached in December.
The Japanese currency has been affected by the wide interest rate gap between the US and Japan, with the Bank of Japan's warning about higher rates increasing the pain of the yen's spell.
China hit its weakest level in a year at 7.3199 per dollar, as falling yields and expectations of domestic price cuts continued to weigh on the currency.
Among cryptocurrencies, bitcoin gained 1.59% to $98,658.