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Dollar lower, but on track for best week in two months

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Dour euro zone outlook weighs on euro this week

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Traders price in about 40 bps of Fed rate cuts in 2025

(Updated throughout in New York afternoon time)

By Karen Brettell

NEW YORK, Jan 3 (Reuters) - The dollar dipped on Friday

but was on track for its strongest weekly performance in a month

on expectations that the U.S. economy will continue to

outperform its peers globally this year and that U.S. interest

rates will stay relatively higher.

A still solid labor market and stubbornly high inflation

have lifted Treasury yields in recent weeks and boosted demand

for the U.S. currency.

New policies under the incoming Donald Trump administration,

including business deregulation, tax cuts, curbs on illegal

immigration and tariffs, are also expected to boost growth and

add to price pressures.

The dollar index was last 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 recent dollar gains there remains considerable

uncertainty over when policies will be introduced by the new

U.S. government, and what their ultimate impact will be. That

could pause the dollar rally in the near-term.

"We're likely to see a bit of a dollar pullback as the

administration comes in because all these proposed tariffs -

they're going to take some time to implement and we don't

actually know if all of these proposals are going to be

implemented or not," said Helen Given, FX trader at Monex USA in

Washington.

"As we move through the second half of this calendar year I

think we're going to see some more dollar strength," Given said.

The dollar briefly pared losses after data on Friday showed

that U.S. manufacturing moved closer to recovery in December,

with production rebounding and new orders rising further.

The euro faces a weaker growth outlook and may be hurt by

U.S. tariffs, with the European Central Bank expected to cut

rates further than the Federal Reserve this year.

Traders are pricing in 100 basis points rate cuts by the ECB

by year-end, and only a less than certain chance of 50 basis

points of cuts by the Fed.

Uncertainties including the French budget battle and German

elections are also weighing on the single currency.

The euro was last up 0.39% at $1.0305 but was

headed for a 1.22% weekly decline, its worst since

early-November.

Sterling gained 0.41% to $1.2431. It was on track

to lose roughly 1.15% for the week, the most since early

November.

The dollar slid 0.26% to 157.11 Japanese yen,

holding just below a five-month high of 158.09, reached in

December.

The Japanese currency has suffered from the wide interest

rate differential between the U.S. and Japan, with the Bank of

Japan's caution over further rate increases spelling more pain

for the yen.

China's onshore yuan hit its weakest level in

over a year at 7.3199 per dollar, as falling yields and

expectations of more domestic rate cuts continued to weigh on

the currency.

In cryptocurrencies bitcoin gained 1.59% to $98,658.