Dollar Strengthens on Trump’s Policies and Solid US Economy
The US dollar has capped off its strongest yearly advance in nearly a decade, driven by President-elect Donald Trump’s tax-cut and tariff policies, as well as the solid performance of the US economy. This surge has led to a significant increase in interest rates, making the dollar an attractive option for investors.
A Resilient Expansion
The surprisingly resilient expansion of the US economy has driven traders to reassess their expectations for the Federal Reserve’s monetary policy. As a result, the Bloomberg Dollar Spot Index has reached its highest point since November 2022, with a nearly 8% increase this year – the most since 2015.
Fed Officials Signal Caution
Fed officials have signaled caution about further interest-rate reductions, breaking with other central banks that are expected to dial back rates more quickly. This has given investors an incentive to shift cash to the US, pushing up the currency. The dollar has advanced against all of its major peers in 2024, with the New Zealand dollar, Norwegian krone, and Japanese yen weakening the most against the US currency.
Analysts Predict Continued Rally
Analysts believe the dollar rally has room to continue into early next year. “Many of Trump’s initial policies will be bullish for the dollar in early 2025,” said Jayati Bharadwaj, a currency strategist at TD Securities. However, some analysts predict that the Fed will resume easing in the second half of next year, which could provide a pivot for the dollar’s strength.
Market Players Increase Bets
A group of market players, including hedge funds and asset managers, have increased their aggregate bets on the dollar’s rise to $29.8 billion, according to data compiled by Bloomberg. This is the most bullish positioning toward the US currency since April.
Doubts About Further Gains
While the dollar has made significant gains, some analysts are skeptical about how much further it will run. “We are moderately bullish the greenback,” said Sarah Ying, head of currency strategy at CIBC Capital Markets in Toronto. “Most of the Fed path is already priced in, and we suspect dollar momentum should lose some steam in the second quarter.”
A Strong Start to 2025?
As we head into 2025, it remains to be seen whether the dollar will continue its upward trend. One thing is certain, however – the US economy and Trump’s policies will continue to play a significant role in shaping the dollar’s trajectory.
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