US Dollar Soars to Strongest Yearly Advance in Nearly a Decade
The US dollar has experienced its strongest yearly advance in nearly a decade, driven by a solid US economy and President-elect Donald Trump's tax-cut and tariff policies. The Bloomberg Dollar Spot Index rose to the highest since November 2022, with an 8% increase this year, making it the most significant gain since 2015.
This upward trend can be attributed to the surprisingly resilient expansion of the US economy, which has caused traders to dial back their expectations for how much the Federal Reserve will ease monetary policy. As a result, investors have become more inclined to shift cash to the US, thereby pushing up the value of the dollar.
Analysts suggest that the dollar rally still has room to continue into early next year, following Fed officials' signals of caution about further interest-rate reductions. This stance is in contrast to other central banks, which are expected to reduce rates more quickly. The incentive for investors to shift cash to the US has resulted in a rise in the value of the dollar against all its major peers.
Dollar Advances Against Major Peers
The New Zealand dollar, Norwegian krone, and Japanese yen have weakened significantly against the US currency, with the dollar advancing against all major peers in 2024. Market players, including hedge funds and asset managers, have increased their aggregate bets on the dollar's rise to some $29.8 billion, according to data compiled by Bloomberg.
This is the most bullish positioning toward the US currency since April, indicating a strong confidence in its continued growth. However, there are still doubts about how much further the dollar will run, given the scale of its gains and the fact that the slower pace of interest-rate cuts is largely priced into the market.
Market Players' Views on Dollar Strength
Jayati Bharadwaj, a currency strategist at TD Securities, believes that many of Trump's initial policies will be bullish for the dollar in early 2025. In contrast, Sarah Ying, head of currency strategy at CIBC Capital Markets in Toronto, is moderately bullish about the greenback but expects its momentum to lose some steam in the second quarter.
Bharadwaj notes that the Fed's signals of caution have given investors an incentive to shift cash to the US, while Ying suggests that most of the Fed path is already priced into the market. Despite these differing views, both analysts agree on the dollar's strength and its potential for continued growth.
Market Expectations and Dollar Strength
The rise in the dollar's value has been driven by a combination of factors, including a strong US economy and the slow pace of interest-rate cuts. Market players' increased bets on the dollar's rise reflect their confidence in its continued growth.
However, there are still concerns about how much further the dollar will run, given its significant gains and the fact that the slower pace of interest-rate cuts is largely priced into the market. Analysts expect the dollar to continue its strength into early next year but anticipate a potential pivot in the second half of 2025 as the Fed resumes easing.
Conclusion
The US dollar's strong yearly advance is a testament to the solid US economy and President-elect Donald Trump's tax-cut and tariff policies. The dollar's rise against all major peers has been driven by market players' increased bets on its growth, with analysts expecting it to continue its strength into early next year.
While there are concerns about how much further the dollar will run, given its significant gains and the fact that the slower pace of interest-rate cuts is largely priced into the market, most analysts agree on its potential for continued growth. As the US economy continues to grow and the Fed signals caution about further interest-rate reductions, investors remain confident in the dollar's strength and its ability to continue its upward trend.