Dollar Strength Expected to Continue in 2025
The U.S. stock market’s remarkable performance is set to keep the dollar strong, as global investors flock to America in search of lucrative opportunities. According to Kit Juckes, chief foreign exchange strategist at Societe Generale, the dollar’s surge against global currencies last year is likely to persist in 2025, driven by the influx of foreign capital into the U.S. equity market.
Interest Rate Disparity Fuels Dollar Strength
Juckes points to the significant difference in neutral interest rates between the U.S. and Europe as a key factor supporting the dollar’s strength. With the U.S. neutral rate higher than its European counterpart, the dollar is expected to appreciate indefinitely. This disparity is already reflected in the dollar’s value, Juckes notes.
Economic Fundamentals Support Dollar
The Federal Reserve’s signaling of fewer rate cuts, combined with sticky inflation and President-elect Trump’s policies, has lifted the greenback in recent months. In contrast, top European economies are struggling, and the European Central Bank is expected to cut rates more aggressively. China’s slowing growth has also prompted policymakers to implement easing measures, further supporting the dollar.
Politics: The Wild Card
While economic fundamentals point to a strong dollar, politics pose a significant risk. Trump’s proposed tariffs and potential trade deals could have far-reaching implications for global trade and the dollar’s value. Any deal that benefits the U.S. would also need to be good for global trade, which could lead to improved growth outside the U.S. and downward pressure on the dollar.
American Exceptionalism: A Concern
The dollar’s strength has sparked concerns about American exceptionalism, with some warning of a bubble in the U.S. market. Ruchir Sharma, chair of Rockefeller International, has cautioned that the U.S. is “over-owned, overvalued, and overhyped” to a degree never seen before. Mohamed El-Erian, Allianz chief economic advisor, has also warned of a “huge sucking sound” of foreign capital flooding into the U.S., further solidifying America’s dominance in global markets.
U.S. Dominance Expected to Increase
In the short term, the U.S. is likely to maintain its edge, driven by faster growth and hotter inflation. This period of U.S. dominance is expected to increase, both positively and negatively, according to El-Erian. As the rest of the world struggles to cope with this new reality, the dollar is likely to remain strong, fueled by its attractive equity market and favorable economic fundamentals.
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