According to the latest survey from Bloomberg Markets Live Pulse, the dollar is expected to start strongly in early 2025, but will face risks such as accelerating inflation and surging fiscal deficits over the next year.
Entering next year, 89 survey respondents had differing opinions on the risks that could cause the most harm to the dollar. Concerns over deficits accounted for the largest portion at 38%.
Another 32% believe that if President-elect Trump, who will take office in January, implements the tariff measures he promised during his campaign, weak economic growth in the U.S. and globally will put pressure on the dollar next year.
The Bloomberg Dollar Spot Index has just recorded its longest weekly winning streak in a year, reaching its highest point since 2022, as traders have flocked to bet bullish, believing that Trump's policies will support the dollar. However, survey respondents pointed out that while these policies may create conditions for a stronger dollar in the short term, their long-term impact on the economy will ultimately dampen the currency's appeal.
Trump's first term was like this. From winning the 2016 election to taking office in January the following year, as U.S. Treasury yields soared, the dollar's exchange rate surged nearly 5%. However, as the U.S. economy lost momentum and the European economy rebounded, the dollar fell sharply in 2017.
Nevertheless, those supporting the recent strength of the dollar outnumber those who are bearish by about 2.5 times. About 70% of respondents believe the Bloomberg Dollar Index will rise in the coming month.
There are two key factors supporting confidence in the dollar as we approach the end of the year.
Respondents and investors expect U.S. Treasury yields to be influenced by the Fed's cautious interest rate cuts, which will promote inflows into U.S. assets. They also mentioned that a series of uncertainties surrounding Trump's future economic policies could lead the dollar to become a safe haven.
Peter Vassallo, a portfolio manager at BNP Paribas Asset Management, said: "We are optimistic about the dollar, but the core question remains how far the dollar can go." He increased his long positions in dollar spot and options against the euro, Australian dollar, and Japanese yen after the U.S. elections.
Weighed down by expectations that the European Central Bank will actively ease monetary policy to boost economic growth in the region, the euro fell to its weakest level in two years last Friday. This stands in stark contrast to the situation in the U.S., where strong economic data has eased prospects for future Fed rate cuts.
Professional and retail investors responding to the survey are confident and unwilling to take history into account. According to data since 2005, the Bloomberg Dollar Index has averaged a 0.5% decline in December, which is a seasonally weak month for the dollar.
Respondents indicated that the Mexican peso will be the first to be affected by a strengthening dollar, followed by the yen and the Brazilian real.
Data from the Commodity Futures Trading Commission (CFTC) as of November 19 shows that since the U.S. elections, speculative currency traders have increased their long positions in the dollar, currently holding about $23.3 billion in bullish derivatives bets. This is the highest level since June.
Most (about 55%) of the investors surveyed expect the dollar to peak before the U.S. stock market. At the same time, more than half of the respondents indicated that they plan to maintain their positions in the S&P 500 index stable over the next month.
Many potential risk factors expected in the coming months, such as high tariffs impacting economic growth and inflation policies pushing up yields, are also seen as potential strong catalysts, complicating the environment for the dollar.
Lauren van Biljon, head of interest rates and foreign exchange at the Allspring Global Fixed Income team, believes that it will take time to decipher how the currency markets will respond to the final form of Trump's specific policies.
Given the various issues surrounding Trump's economic policy agenda, traders are betting that a second term for Trump will intensify foreign exchange volatility, which could mean higher levels of currency fluctuations.
van Biljon said: "I certainly do not think the strength of the dollar has peaked. Nevertheless, I believe there will be opportunities for both sides in the market next year. The market is very good at analyzing short-term risks, but long-term risks remain unclear."
Article republished from: Jin Ten Data
