U.S. dollar slips, still set for biggest annual gain since 2015

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By Elizabeth Howcroft

LONDON (Reuters) - The dollar fell on Friday but was still on track for its biggest annual gain since 2015, in the last trading day of a year dominated by Federal Reserve rate hikes and fears of a sharp slowdown in global growth.

Asian equities had risen earlier in the session after market sentiment on Wall Street got a boost on Thursday from data showing rising U.S. jobless claims, which suggested the Fed's interest rate hikes were lowering demand for labour.

With liquidity lower due to holidays, the dollar index was down around 0.3% on the day at 103.720.

The U.S. Federal Reserve has raised rates by a total of 425 basis points since March in an attempt to curb surging inflation.

Against a basket of currencies, the dollar has gained around 8.4% so far in 2022 - its biggest annual jump in seven years - but it has pared some gains in recent weeks as investors expect the Fed's rate-hiking cycle to end next year.

“We’re not yet convinced that the Fed is turning dovish or that the U.S. inflation will come to target for good, so there’s room for the dollar to rebound," said Jan Von Gerich, chief analyst at Nordea.

"But for the near-term outlook we’re looking for some more performance in the euro versus the dollar."

The euro was up 0.2% on the day at $1.0681, on track for a 6.2% annual loss versus the dollar, compared to last year's 7% drop. A combination of weak eurozone growth, the war in Ukraine, and the Fed's hawkishness has put the euro under pressure this year.

European Central Bank policymaker Isabel Schnabel said last week that the central bank must be prepared to raise interest rates further, including by more than the market expects, if that is needed to bring down inflation.

The British pound was down 0.1%, set for a 11% annual drop.

The Australian dollar, seen as a liquid proxy for risk appetite, was up 0.3% on the day at $0.6796, but on track for a 6.5% drop on the year overall.

China's offshore yuan was up around 0.9% against the U.S. dollar, with the pair at 6.9085. Still, it was set for an 8.6% annual drop, hurt by dollar strength and a domestic economic slowdown.

Optimism about China's reopening after three years of strict COVID-19 curbs has been tempered by surging infections which threaten more economic disruptions.

The United States, South Korea, India, Italy, Japan and Taiwan have all imposed COVID tests for travellers from China. The World Health Organization said it needs more information to assess the latest surge in infections.

Nordea's Von Gerich said China's reopening "will be a source of volatility."

“But when we get past that, when we really get to the really positive economic impact, I think it should boost risk appetite globally," he added.

The U.S. dollar was down around 0.9% against the Japanese yen, at 131.85.

The Bank of Japan's ultra-dovish stance has seen the dollar gain 14.5% versus the yen so far this year, in the yen's worst performance since 2013. But the Bank of Japan's surprise decision to tweak its bond yield control programme saw the yen jump to a four-month high against the U.S. dollar earlier in December.

The Swiss franc was steady versus the dollar, at 0.92275.

The Swiss National Bank increased the amount of the Swiss currency it sold in the third quarter of 2022, the central bank said on Friday, indicating that its focus has switched from stemming the franc's strength to fighting inflation.