Asian stock markets fell as concerns over potential policy shifts under President Donald Trump and political instability in South Korea dampened sentiment. A holiday closure in Tokyo contributed to muted activity across the region. Meanwhile, U.S. equity markets retreated sharply, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average posting losses amid fading hopes for a Santa Claus rally. Rising interest rates and lingering economic uncertainties further compounded investor caution.

In the U.K., optimism dominated as fund management CEOs highlighted attractive valuations and political stability, driving the FTSE 100 to new highs with bullish forecasts for 2025. Indian benchmarks were expected to open slightly higher, supported by strong auto stock performance. The U.S. dollar began 2025 with a strong upward trajectory, bolstered by expectations of sustained high interest rates under the Trump administration. The yen hit a five-month low, pressured by significant interest rate disparities and cautious sentiment over potential Japanese intervention.

Market Outlook: Uncertainty and Volatility Ahead

The global market outlook remains mixed, with geopolitical and economic uncertainties driving cautious investor sentiment:

• U.S. Equities: Analysts forecast a potential stock market correction in Q1 2025, citing extreme optimism and declining momentum indicators. A Federal Reserve rate cut at its upcoming meeting could introduce volatility as markets digest signals about the future path of monetary policy.
• Asia: Political and economic instability in South Korea and cautious sentiment in Japan are likely to limit upside potential. Indian markets may remain steady until the quarterly earnings season begins.
• Dollar: Expected to maintain strength amid geopolitical tensions and a weaker global growth outlook, though dovish Fed signals could temper gains.
• Commodity-Linked Currencies: Australian and New Zealand dollars may face headwinds if global growth concerns persist.

Currency Market Summary: Dollar Dominates, Yen Under Pressure

• Dollar: Continued its strong start to 2025, rising against most major currencies on expectations for sustained high U.S. interest rates.
• Yen: Depreciated further, marking its fourth consecutive year of double-digit declines due to significant interest rate disparities and concerns over potential Japanese intervention.
• Euro and Sterling: Remained steady in subdued trading, reflecting the absence of significant catalysts.
• Australian and New Zealand Dollars: Saw slight gains but remained near two-year lows, pressured by weak global sentiment.
• Indian Rupee: Faced downward pressure amid expectations that the Reserve Bank of India may loosen its currency stance to address overvaluation in real effective exchange rate terms.

Currency Outlook: Strength and Vulnerabilities Across Majors

• Dollar: Likely to remain firm in the near term, supported by higher U.S. interest rates and safe-haven demand amid geopolitical tensions.
• Yen: Expected to face continued weakness unless Japanese authorities intervene or the Bank of Japan signals a significant policy shift.
• Euro and Sterling: Likely to stay range-bound without significant catalysts to drive meaningful movement.
• Commodity-Linked Currencies: Australian and New Zealand dollars face downside risks tied to global growth concerns, though improvements in risk sentiment could offer temporary relief.
• Indian Rupee: May experience gradual depreciation if the Reserve Bank of India adopts a more flexible currency policy to enhance export competitiveness.

Conclusion: Geopolitical and Policy Uncertainty to Shape Early 2025 Trends

Markets are set to remain volatile as geopolitical risks, central bank policies, and economic data influence investor sentiment. The dollar is expected to retain its strength, while the yen and commodity-linked currencies face continued pressure. Equity markets may remain under pressure from rising interest rates and economic concerns, with participants bracing for further volatility as key policy signals emerge in the early months of 2025.