Dollar Dominance Expected to Continue in 2025
The US dollar is poised to strengthen its grip on global currency markets, with many foreign exchange forecasters predicting it will reach parity with the euro by 2025. Last year, the greenback surged over 7% against a basket of major currencies, driving the euro to a two-year low of $1.02.
US Economic Resilience Fuels Dollar’s Rise
The dollar’s remarkable run can be attributed to sustained US economic resilience, which has defied expectations. Additionally, the US Federal Reserve’s signal in December that it is in no hurry to cut interest rates further has cemented the dollar’s gains. Inflation fears rooted in President-elect Donald Trump’s proposed tariff and tax policies have also contributed to the dollar’s strength.
No Alternative to the Dollar
According to Paul Mackel, global head of FX at HSBC, “Our view for the next few months is for the dollar to still be quite strong. Even thinking about what potential new policies could be unveiled with the incoming administration – it should be favoring the dollar. In some ways, there’s a flavor of ‘there is no alternative’.” Interest rate futures are now fully pricing in only one more Fed rate reduction by end-2025, limiting dollar downside.
Euro Expected to Struggle
The euro, currently at $1.03, is expected to rise modestly to $1.04 over the coming three and six months, and then to $1.05 by year-end. However, this is markedly lower than expected a few months ago. Speculators have increased their net-long dollar bets to the highest since May, according to the latest positioning data from the Commodity Futures Trading Commission.
Dollar Strength to Persist
Foreign exchange strategists believe that the allure of higher longer-term US Treasury yields and expectations of larger rate reductions from other major central banks will limit dollar downside. As HSBC’s Mackel noted, “When you look at other currencies – their fundamentals, yields, and other sources of uncertainty around them – you still come back to the dollar.”
Parity with the Euro a Possibility
A near two-thirds majority of respondents to an additional question believe the euro will reach parity against the dollar this year, with most predicting it will happen in the first half of the year. Jane Foley, senior FX strategist at Rabobank, noted, “We maintain a target of $1 for the euro for Q2, though we recognize the risk that this target could be achieved earlier…while the dollar could end the year off its highs, we expect the theme of broad USD strength to remain in force.”
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