A key market narrative of 2024 has been the U.S. Dollar’s remarkable strength, with data showing that it is trading at levels last seen 22 years ago in 2002. Wall Street is anticipating this bullish momentum to continue into the new year as President-elect Donald Trump‘s proposed tax cuts and tariff hikes act as a tailwind.
The Dollar index is up 6.73% year-to-date with a 52-week range of 100.1570 to 108.5410 per unit. If the Greenback can hold on to these gains, the currency would leave behind the second-best year in terms of annual gains since 2015.
The currency hit its 2024 high at 108.541 after the Federal Reserve Open Market Committee delivered a 25 basis point cut on Dec. 17. The FOMC anticipates only two cuts in 2025 as compared to four announced during the September meeting.
JPMorgan Research anticipates further appreciation of the U.S. dollar in the near future, potentially reaching new highs.
Meera Chandan, co-head of Global FX Strategy at JPMorgan, explains, “The recent election outcome has created a confluence of factors favoring a stronger dollar: diminished global growth prospects, widening economic disparities between the U.S. and other nations, and upward revisions to the terminal Fed funds rate for 2025. This combination represents a powerful set of cyclical drivers for the USD.”
Chandan acknowledges that these are initial assessments and may be subject to adjustments as the policy implications of the Trump administration become clearer next year. Nevertheless, she emphasizes that “for now, they provide a compelling economic justification for maintaining a long USD position through the first quarter of 2025.”
According to the analysts at RBC Capital, 2025 is set to be an interesting year as Trump takes office on Jan. 20, promising to deliver big policy changes in the U.S. Early appointments point to a desire to hit the ground running on at least three main pillars of change: (1) deregulation, (2) tariffs, (3) immigration.
“We struggle, as everyone does, to know what portion of Trump rhetoric we should bake into our outlook. As former Canadian Prime Minister Stephen Harper put it, ‘Trump should be taken seriously, but not literally’,” the note said.
“The long USD trade seems ‘obvious,’ but we have tried to avoid it in our 2025 directional thematic trades. Like almost everyone else, we would rather be long USD than sort but with DXY at 107 and positioning already crowded heading into the new year, the risk-reward doesn't feel great,” the note said.
According to the note by year-end 2025, a potential Fed tightening bias could further support USD, but with valuations near historical highs, carry may be the primary driver of gains. While a U.S. slowdown remains a downside risk, it appears less likely given the Trump administration’s deregulatory push.
See Also: Top 7 Blue-Chip Stocks With The Best Return Potential Going Into 2025
According to Jonas Goltermann, deputy chief markets economist at Capital Economics, the U.S. dollar will appreciate further in 2025 as the economy and stock market outperform peers, and President-elect Donald Trump imposes significant tariffs.
“The Republican sweep in the November elections triggered a broad dollar rally. We anticipate Trump will implement a 10% universal tariff and a 60% tariff on Chinese imports shortly after taking office, a move not yet fully priced in by markets, despite general optimism about the US economy and the dollar,” he added.
“We think the adjustment to higher U.S. tariffs will lead to another leg higher in the dollar next year, taking the DXY index to ~110, near its 2022 peak. That might prompt more talk of a Plaza 2.0/Mar-a-Lago Accord, but we think that idea remains far-fetched.”
“Although there's not a lot on the horizon that can trigger a massive dollar selloff, its ability to continue marching higher hinges on the actual size of Trump's tax cuts and tariff increases that will eventually be approved,” said Raffi Boyadjian, lead investment analyst at XM.
According to Franklin Templeton, “The Fed easing cycle will be a dominant factor for the USD. The two main comparisons we draw against the Fed cyclically, interest-rate-wise, are emerging markets, and Japan.”
The USD’s demand has been rising due to the “Uncertainties arising from expected Trump's policies and hawkish comments from the Fed towards rate cycle,” said Kunal Sodhani, vice president of the global trading center at Shinhan Bank.
Price Action: According to Benzinga Pro data, WisdomTree Bloomberg US Dollar Bullish Fund ( USDU ) is up 13.04% on a year-to-date basis, as of Dec. 24 close, whereas Invesco DB US Dollar Index Bullish Fund ( UUP ) advanced by 7.5% in the same period.
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