Reuters, London, SingaporeAs traders expected strong U.S. growth to make the Federal Reserve cautious on rate-cutting far beyond 2025, the U.S. dollar headed toward a nearly 7% annual gain on Friday, while Japan's yen ended a fourth consecutive year of losses.


The dollar index, which compares the value of the currency to its main competitors, increased 0.08% on Friday to 108.16, coming close to a 2.2% monthly increase and setting the stage for a 6.6% year-end gain.

While the euro remained at two-year lows, the dollar was also approaching a 5.5% gain this month against the yen and an 11.8% gain for 2024 against the weakening Japanese currency.

Earlier this month, Federal Reserve Chair Jerome Powell stated that U.S. central bank officials "will exercise caution. about further cuts" following an as-expected quarter-point rate reduction.

The inauguration of President-elect Donald Trump later this month will also have an influence on the U.S. economy. Economists consider his proposed deregulation, tax cuts, tariff hikes, and stricter immigration laws to be both inflationary and pro-growth.
Meanwhile, traders expect the European Central Bank to continue lowering interest rates and the Bank of Japan to maintain current monetary policy settings.
Friday saw the euro trade at $1.042, barely above a low of roughly $1.04 hit on December 18, while the yen stayed around levels last seen in July, at 157.76 per dollar.

No drop is fully priced into money markets until June, when the ECB is anticipated to have lowered its rate, but traders are pricing in 37 basis points of U.S. rate cuts in 2025.  deposit rate by a full percentage point to 2% as the euro zone economy slows.

This month, the BoJ refrained from raising interest rates. Governor Kazuo Ueda's statement that he would rather wait for clarity on Trump's policy highlights the growing anxiety among central banks around the world over U.S. tariffs that are affecting international commerce.
Tighter U.S. monetary policy hasn't yet had an impact on global stocks because of the dominance of U.S. stocks in global indexes and the support that exporters receive from weaker currencies in Asia and Europe.
Wall Street's S&P 500 is expected to gain 1.8% on a weekly basis, while MSCI's broad global share index remained 1.6% higher for the week after trading flat on Friday.

Tokyo's Nikkei ended the week 2% higher, and MSCI's broadest index of Asia-Pacific stocks outside of Japan was on track to advance 1.5% weekly.
Stocks in Europe fell, with the  Stoxx 600 flat on Friday and 0.3% higher this week.

Analysts said stock markets could change direction as investors returned from holiday and reassessed the risks of elevated U.S. inflation under Trump for richly-valued Wall Street equities.

"Credible reasons for excitement (are) balanced by elevated valuations and a host of unknowns. (We) would not be surprised to see (the) Trump rally fade, even if temporarily," Gabelli Funds portfolio manager John Belton said in a note to clients.

In debt markets, higher U.S. rate expectations pulled the 10-year Treasury yield, which rises as the price of the fixed income security falls, to its highest since early May on Friday, at 4.607%.

The two-year Treasury yield, which tracks interest rate forecasts, traded around 4.33%. U.S. debt trends also sent euro zone yields higher, with Germany's benchmark 10-year bund yield rising 5 basis points (bps) to 2.372% on Friday.

Elsewhere in markets, gold prices dipped 0.2% to $2,628 per ounce, set for about a 28% rise for the year and the strongest yearly performance since 2011 as geopolitical and inflation concerns boosted the haven asset.

Oil prices were little changed but set for a weekly rise as investors awaited news of economic stimulus efforts in China, the world's biggest oil importer. Brent crude futures inched 0.1% higher to $72.52 a barrel.