Wall Street is beginning to sour on the dollar as U.S. President-elect Trump's policies and the Federal Reserve's interest rate cuts could put pressure on the greenback in the second half of 2025.
About a half-dozen sell-side strategists, from Morgan Stanley to JPMorgan Chase & Co., now predict the dollar will peak as early as the middle of next year before starting to fall, and Societe Generale SA sees the ICE Dollar Index falling 6% by the end of next year.
The dollar has surged this year and is on track for its biggest gain since 2015 as Trump's victory in the U.S. presidential election and strong economic data prompted traders to reduce expectations for the number of interest rate cuts the Federal Reserve will make next year.
Kit Juckes, head of currency strategy at Société Générale, stated that the strength of the dollar is "nauseating." "We are driving up the prices of an asset that is unsustainable in the long term."
Top sell-side strategists predict the dollar's trend against other currencies in 2025
The Bloomberg Dollar Spot Index has risen about 6.3% this year, with most of the gains made before and after the election day in early November.
Trump's tariff and tax-cut policies will fuel inflation and complicate the Federal Reserve's task of lowering interest rates in the coming months, a prospect that has bolstered the dollar's rise and encouraged global investors to shift funds to the US.
Morgan Stanley's macro and currency strategists, including Matthew Hornbach and James Lord, believe these threats will bolster the dollar, but they wrote that by this time next year, the dollar will ultimately fall below current levels. They added that a combination of declining US real interest rates and rising risk appetite will make the dollar the most bearish currency.
Currently, Trump's hawkish rhetoric on trade is intensifying. Recently, he pledged to impose a 25% tariff on goods from Mexico and Canada related to immigration and drug-related border issues, leading to declines in the exchange rates of the Mexican peso and Canadian dollar. Earlier this month, Trump mocked some emerging economies for challenging the dollar's status as the world's primary currency.
The recent strength of the US dollar has led to weakness in non-dollar currencies. After the US election in November last year, the euro fell to a two-year low, nearing parity. The MSCI Inc. emerging markets currency index is currently at its lowest level in four months.
Citigroup strategists led by Daniel Tobon believe that any resolution to a potential trade war under a second Trump administration will disappoint dollar bulls. Many dollar bulls believe that Trump's views on trade inherently support the dollar, leading them to build long positions.
Data compiled by Bloomberg based on information from the Commodity Futures Trading Commission for the week ending December 10 shows that speculators and non-commercial traders still hold about $24 billion in long dollar positions, close to the highest level since May. This group has been bullish on the dollar since mid-October before the election.
Imminent Threat
When it comes to the dollar's performance during President Trump's term, history can provide some guidance. Eight years ago, after Trump's election, the dollar surged, but as the US economy lost momentum and the European economy rebounded, the Bloomberg Dollar Index recorded its largest annual decline ever in 2017.
Analysts at MUFG, led by Derek Halpenny, stated that Wall Street believes this decline won't be as severe, but the dollar may peak in the first half of 2025.
Compared to the euphoria following Trump's victory in November when the dollar appreciated, even the options market has somewhat lowered its bullish expectations for the dollar next year.
The Bloomberg Dollar Benchmark one-year risk reversal index is about 1% this week, down from a four-month high of about a month ago, indicating that traders still expect the dollar to rise, but bullish sentiment has stalled.
Sophia Drossos, a strategist and economist at Point72 Asset Management, believes that the dollar has priced in too much good news, and any economic growth outside the US, especially in Europe, will weaken the dollar relative to other currencies. The European Central Bank and the Bank of England are cutting interest rates to help mitigate economic downside risks. Drossos stated, "The foundation for a strong global economy next year is good."
Top currency strategists expect that the biggest support for the dollar in recent months — the Federal Reserve — will further become a burden in 2025. Morgan Stanley's interest rate strategists believe that the decline in US yields next year is expected to be faster than in other parts of the world, which will compress the long-standing interest rate differentials favorable to the dollar.
Other experts believe that if Trump's trade policies are implemented, the dollar will face further strengthening risks because, theoretically, tariffs would cause prices of any imported goods used by US manufacturers to soar.
Barry Eichengreen, an economist at the University of California, Berkeley, who has spent decades studying the global monetary system, stated: "If tariffs make steel and aluminum more expensive, it will create a negative supply shock for the land-based automotive industry that uses these imported inputs."
Additionally, there is a threat of an expanding budget deficit and an increase in the term premium on US bonds, which measures the expected risk of holding long-term government debt.
Analysts at JPMorgan, led by Meera Chandan, co-head of global foreign exchange strategy, wrote in their 2025 outlook that "when the Federal Reserve truly undertakes significant easing, and the dollar loses its relative yield/growth advantage, the dollar's weakness may be unprecedented."
Article forwarded from: Jinshi Data