The dollar advanced on Friday, supported by a robust U.S. consumer sentiment report reaching a seven-month high, highlighting the economy’s resilience. News of Robert Lighthizer’s potential return as U.S. Trade Representative stirred expectations of renewed protectionist measures under President-elect Trump, driving dollar demand as markets braced for possible trade disruptions.

Euro Slips on German Political Turmoil

The euro faced broad weakness, pressured by escalating political uncertainty in Germany. Chancellor Olaf Scholz’s dismissal of the finance minister and discussions of potential snap elections next year have cast doubt on the stability of Europe’s largest economy, weighing heavily on the single currency.

Commodity Currencies Decline on Weak Chinese Demand and Lower Commodity Prices

The Australian dollar saw sharp declines, impacted by a weaker yuan and falling commodity prices following China’s lackluster stimulus announcement. Similarly, disappointing Canadian employment data pressured the Canadian dollar, reinforcing expectations of a Bank of Canada rate cut in the coming months.

Yen Gains as Oil Falls and Risk Sentiment Shifts

The yen strengthened against the dollar as oil prices dropped over 2% due to eased Gulf of Mexico supply concerns. Cross-currency buying also boosted the yen, further supported by demand for safe-haven assets amid rising global uncertainty.

Market Outlook: Dollar Set for Further Gains Amid Trade Policy Risks and Political Instability

Looking forward, the dollar may continue to benefit from risk aversion if protectionist policies under Trump take shape, potentially fueling inflationary pressures and complicating the Fed’s monetary policy. In Europe, the euro could face continued downside if German political instability intensifies, posing risks to eurozone stability. With softening demand expectations from China, the Australian and Canadian dollars may remain under pressure, particularly if global growth concerns persist. Oil prices may stay subdued unless new supply disruptions arise, while defensive equities could see further gains amid heightened uncertainty.

Currency Market Movements: Euro and Commodity Currencies Under Pressure

In currency markets, EUR/USD declined by 0.89% on political concerns in Germany, while GBP/USD fell 0.62% as dollar strength prevailed. USD/JPY slipped 0.18% due to yen demand from cross-buying, and AUD/USD dropped sharply by 1.59% amid weaker commodity prices and Chinese demand concerns. The Canadian dollar also weakened, reflecting lower oil prices and soft employment data.

Cross-pair movements underscored broader trends, with EUR/JPY down by 1.05% due to euro weakness and yen strength, and GBP/JPY declining 0.80% amid mixed pressures on sterling. AUD/JPY fell 1.75%, marking the largest cross-pair movement as the yen outperformed amid a weak Australian dollar.

Currency Outlook: Protectionist Policies and Geopolitical Risks Drive Safe-Haven Demand

The dollar’s upward trajectory may continue if protectionist policies bolster haven demand, especially as markets navigate increased political and economic uncertainty. The euro remains vulnerable to German political turmoil and potential U.S.-EU trade frictions, while the yen may see ongoing demand as a safe-haven asset. The Australian and Canadian dollars could stay under pressure if China’s growth outlook remains subdued. In sum, the currency landscape is primed for a risk-sensitive period, with demand for haven assets set against headwinds for risk-sensitive assets.