The US dollar begins 2025 on a triumphant note, propelled by an economic and monetary shift in its favor. But in an unpredictable Trump era, forex traders expect volatility…
The year 2025 started triumphantly for the US dollar, which reached its highest level in two years against a basket of major currencies. This meteoric rise can be explained by the growing gap between the economic and monetary outlook of the United States and those of most other countries. Under the presidency of Donald Trump, currency traders even anticipate a widening of this gap in the months to come.
US Economy: A Dynamism That Makes a Difference
The indicators published at the start of the year confirm the resilience of the American economy compared to its main competitors. Weekly unemployment claims surprised economists by falling to their lowest level in 8 months. In the manufacturing sector, the S&P Global PMI showed significantly better than expected activity in December.
In comparison, the euro zone shows mixed performance. Its manufacturing PMI index, published by the German bank HCOB, came out below projections and down compared to the previous month. This contrast in dynamism between the two shores of the Atlantic is reflected in the foreign exchange market, where the euro has fallen to a 26-month low against the greenback.
Divergent monetary policies
Beyond the economic situation, it is also the anticipation of a lasting divergence in monetary policies which strengthens the dollar. According to operators, the American Federal Reserve (Fed) will at best only make one rate cut over the whole of 2025. A significantly less accommodating scenario than for the European Central Bank (ECB), from which the market expects at least four relaxations this year.
This gap in outlook is clearly visible in the bond market. The 10-year interest rate differential between US and German government bonds remains close to a 5-year high recorded in mid-December. A risk premium which continues to work in favor of the dollar.
The Trump Era: Between Momentum and Uncertainties
While enthusiasm for the dollar dominates at the start of the year, some currency traders like Brad Bechtel of Jefferies anticipate a continuation of this upward trend in the weeks to come, probably until the inauguration of Donald Trump on January 20. A period during which a return to parity between the greenback and the euro is not excluded.
But once the new Trump administration is in place, the outlook could become more uncertain. The unpredictable temperament of the elected president and the still unclear impact of the measures he intends to implement are likely to increase volatility on the foreign exchange market. A risk factor which could put an end to the surge of the dollar and redistribute the cards.
In Summary
- The US dollar in Olympic form, at its highest in 2 years against other major currencies
- A dynamic American economy that outperforms the euro zone
- Divergent monetary policies in favor of the greenback
- The Trump era, between hopes of reforms and fears of volatility
Although in a strong position at the start of the year, the dollar is not immune to a trend reversal. In a still fragile international context and in the face of a Trump presidency with uncertain contours, its supremacy could be fleeting. The next few months therefore promise to be crucial in determining whether the dollar king can sustainably retain his throne in 2025.
