Dollar's Strength and Bitcoin's Surge

The U.S. dollar hovered near a three-week high on Monday, driven by expectations that the Federal Reserve will cut interest rates this week but signal a measured pace of easing for 2025. Meanwhile, Bitcoin soared above $105,000 for the first time, buoyed by signs that President-elect Donald Trump will go ahead with a potential strategic Bitcoin reserve.

The yen struggled to recover following its worst week since September after reports suggested that the Bank of Japan is leaning towards forgoing a rate hike on Thursday. Sterling was also under pressure after data showed a surprise economic contraction, with the Bank of England set to announce a policy decision shortly after the BOJ.

The dollar received additional support from climbing U.S. Treasury yields. Traders are confident of a quarter-point Fed rate reduction on Wednesday but now expect officials to forgo a cut in January, according to CME's FedWatch tool. With inflation running above the central bank's 2% annual target, Fed policymakers have stated that recent upticks are part of the bumpy path to lower price pressures and not a reversal of the disinflationary trend.

However, analysts warn that renewed inflation could be a concern with Trump set to take office in January. "The U.S. economy has been resilient in the face of high interest rates, which means the potential for inflation to rise if the economy overheats is a problem the Fed will need to address," said James Kniveton, a senior FX dealer at Convera.

The U.S. dollar index was steady at 106.86 as of 0053 GMT, after rising to 107.18 on Friday for the first time since Nov. 26. Bitcoin surged as much as 3.6% from Sunday's close to reach an all-time high of $106,533, driven by Trump's suggestion of a U.S. Bitcoin strategic reserve.