GLOBAL MARKETS-Dollar set for big annual gain as traders brace for high US rates

Updates prices

By Naomi Rovnick and Ankur Banerjee

LONDON, SINGAPORE Dec 27 (Reuters) - The U.S. dollar was headed for an almost 7% annual gain while Japan's yen was set for a fourth consecutive year of losses on Friday, as traders anticipated robust U.S. growth would make the Federal Reserve cautious on rate-cutting well into 2025.

The dollar index =USD, which measures the currency against major rivals, rose 0.08% to 108.06 to approach a 2.2% monthly rise and was on course to close 2025 6.6% higher.

The dollar was also nearing a 5.5% gain this month against the yen and an 11.8% advance for 2024 against the weakened Japanese currency, while the euro stayed close to two-year lows.

Fed Chair Jerome Powell said earlier this month that U.S. central bank officials "are going to be cautious about further cuts" after an as-expected quarter-point rate reduction.

The U.S. economy also faces the impact of President-elect Donald Trump, who has proposed deregulation, tax cuts, tariff hikes and tighter immigration policies that economists view as both pro-growth and inflationary.

Traders, meanwhile, anticipate the Bank of Japan will keep its monetary policy settings loose and the European Central Bank will deliver further rate cuts.

The yen on Friday JPY=EBS hovered around levels last seen in July, at 157.75 per dollar, while the euro EUR=EBS traded at $1.042, just above a low of about $1.04 struck on Dec. 18.

Traders are pricing in 37 bps of U.S. rate cuts in 2025, with no reduction fully priced into money markets until June, by which time the ECB is expected to have lowered its deposit rate by a full percentage point to 2% as the euro zone economy slows.

The BoJ held back from a rate hike this month. Governor Kazuo Ueda said he preferred to wait for clarity on Trump's policies, underscoring rising angst among central banks worldwide of U.S. tariffs hitting global trade.

For now, the dominance of U.S. equities in world indices and weaker currencies in Asia and Europe helping to boost exporters have prevented tighter U.S. monetary policy from weighing on global stocks.

MSCI's broad global share index .MIWO00000PUS traded 0.1 higher on Friday to remain 1.5% higher for the week, with Wall Street's S&P 500 .SPX on course for a 1.8% weekly gain.

Futures trading indicated the S&P ESc1 would start the New York session about 0.4% lower.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was heading for a 1.5% weekly rise and Tokyo's Nikkei .N225 closed the week 2% higher.

European stocks lagged, with the Stoxx 600 .STOXX flat on Friday and 0.3% higher this week.

Analysts said stock markets could change direction as investors returned from holiday and reassessed the risks of elevated U.S. inflation under Trump for richly-valued Wall Street equities.

"There is some potential upside left for this bull market, but it is limited," said Pictet Asset Management chief strategist Luca Paolini.

"(Trump's) inauguration day is a potential inflection point and all the (prospective) good news will be in the price by then," Paolini added.

In debt markets, higher U.S. rate expectations pulled the 10-year Treasury yield US10YT=RR, which rises as the price of the fixed income security falls, to its highest since early May on Friday, at 4.611%.

The two-year Treasury yield, which tracks interest rate forecasts, traded around 4.34%. U.S. debt trends also sent euro zone yields higher, with Germany's benchmark 10-year bund yield rising 7 basis points (bps) to 2.392% on Friday.

Elsewhere in markets, gold prices XAU= dipped 0.3% to $2,626 per ounce, set for about a 27% rise for the year and the strongest yearly performance since 2011 as geopolitical and inflation concerns boosted the haven asset.

Oil prices were also set for a weekly rise as investors awaited news of economic stimulus efforts in China, the world's biggest crude importer. Brent crude futures LCOc1 rose 0.7% on the day to $73.78 a barrel, 1.1% higher for the week.

(Reporting by Ankur Banerjee in Singapore; Editing by Sam Holmes, Barbara Lewis and Alexander Smith)

((ankur.banerjee@thomsonreuters.com; Mobile +65 8121 3925; Follow on X (formerly Twitter): @AnkurBanerjee17;))