The dollar is headed for its best year in almost a decade as US economic strength reins in expectations for the Federal Reserve’s rate-cutting cycle and President-elect Donald Trump’s threats of harsh tariffs underpin bullish bets on the currency.
The Bloomberg Dollar Spot Index rose more than 7% so far this year, the best run since 2015. All currencies in the developed world weakened against the greenback as other central banks had to support local economies.
“The main pillar of support for the US dollar this year has been the strength of the economy,” said Skylar Montgomery Koning, a foreign-exchange strategist at Barclays. “That strength means the Fed is coalescing on a shallow cutting cycle that leaves rates in the US higher than elsewhere, helping sustain historically elevated dollar valuations.”
The dollar gauge touched the strongest level in over two years earlier this month when the Fed cut interest rates but signaled a slowdown in the pace of monetary easing. Still, as Wall Street bets the dollar has more room to rise in 2025, global economic growth may improve later in the year, supporting other currencies and weighing on the dollar.
In 2024 so far, the yen, Norwegian krone and New Zealand dollar were the worst performers in the Group of 10, with each falling more than 10% against the greenback as of Dec. 27. The euro has lost about 5.5% to trade near $1.04, with a growing number of strategists seeing the risk of the common currency reaching parity with the dollar next year.
Non-commercial, speculative traders have steadily boosted bullish dollar bets in the run-up to and since the US election. They now hold some $28.2 billion in contracts tied to a future rise in the greenback, the most since May.
“Current dollar strength is consistent with incoming data, we do not think markets have fully incorporated our tariff expectations, and risks to our forecasts are still to the upside over the medium term,” wrote Goldman Sachs analysts led by Kamakshya Trivedi in a note on Dec. 20. “Especially if stronger sentiment translates into more durable US growth despite more protectionist measures.”
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