(Bloomberg) — The dollar is headed for its best year in nearly a decade, as the strength of the U.S. economy limits expectations for a round of interest rate cuts by the Federal Reserve and President-elect Donald Trump’s threats to impose harsh tariffs support bullish bets on the currency.
Most read from Bloomberg
The Bloomberg Dollar Spot Index has risen more than 7% so far this year, the best rise since 2015. All currencies in the developed world also weakened against the dollar as other central banks were forced 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, foreign exchange strategist at Barclays. “This strength means the Fed is rallying around a shallow tapering cycle that keeps interest rates in the US higher than elsewhere, helping to maintain historically high dollar valuations.”
The dollar gauge touched its strongest level in more than two years earlier this month when the Federal Reserve cut interest rates but signaled a slowdown in the pace of monetary easing. However, while Wall Street is betting that the dollar has more room to rise in 2025, global economic growth may improve later in the year, supporting other currencies and pressuring the dollar.
In 2024 so far, the yen, Norwegian krone and New Zealand dollar were the worst performers in the G10, each down more than 10% against the dollar as of December 27. The euro lost about 5.5% to trade near $1.04, with an increasing number of strategists seeing the risk of the single currency reaching parity with the dollar next year.
The Bloomberg Dollar Spot Index posted a slight advance on Friday to cap a fourth week of gains, rising alongside longer-term Treasury yields as traders evaluate the Federal Reserve’s monetary path and the policies of the incoming Trump administration.
Non-commercial speculative traders have steadily ramped up bullish dollar bets in the run-up to and after the US election. They now hold $28.2 billion worth of contracts linked to a future rise in the US currency, the largest amount since May.
“Current dollar strength is consistent with incoming data, we do not believe markets have fully integrated our tariff expectations, and risks to our medium-term upside outlook remain,” Goldman Sachs analysts led by Kamakshya Trivedi wrote in a note. December 20: “Especially if stronger sentiment translates into more sustainable growth in the US despite more protectionist measures.”
(Updates levels, Bloomberg Dollar Index.)
Most read from Bloomberg Businessweek
©2024 Bloomberg L.P