(Bloomberg) — The dollar is headed for its best year in nearly a decade as U.S. economic strength controls expectations about the Federal Reserve’s rate cut cycle and President-elect Donald Trump’s threats to impose Severe tariffs support bullish bets on the currency.
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The Bloomberg Dollar Spot Index is up more than 7% so far this year, the best run since 2015. All developed world currencies weakened against the dollar 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, currency strategist at Barclays. “That strength means the Federal Reserve is joining a cycle of shallow cuts that leaves rates in the United States higher than elsewhere, helping to sustain historically elevated dollar valuations.”
The dollar gauge hit the highest level in more than two years earlier this month as the Federal Reserve cut interest rates but signaled a slowdown in the pace of monetary easing. Still, while Wall Street bets that 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.
So far in 2024, the yen, Norwegian krone and New Zealand dollar have performed the worst in the Group of 10, each falling more than 10% against the dollar as of December 27. The euro has lost about 5.5% to trade near $1.04, and a growing number of strategists see the risk of the common 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-dated Treasury yields as traders assess the Federal Reserve’s monetary path and the administration’s policies. Trump’s incoming.
Speculative and non-commercial traders have consistently driven bullish dollar bets in the run-up to and following the US elections. They now have about $28.2 billion in contracts tied to a future rise in the dollar, the most since May.
“Current dollar strength is consistent with incoming data, we do not believe markets have fully factored in our tariff expectations, and risks to our forecasts remain bullish over the medium term,” Goldman Sachs analysts led by Kamakshya Trivedi wrote in a note on December 20. “Especially if stronger sentiment translates into longer-lasting US growth despite more protectionist measures.”
(Updates levels, Bloomberg dollar index).
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