While Japan is slipping, China is trying to regain its glory and old Europe is faltering, Uncle Sam’s country is performing outrageously. The latest thunderclap, job creation in December 2024 in the United States far exceeded expectations.
The strength of the economy and the risk of wage inflation support a rebound in interest rates beyond one year in dollars and call into question the extent of the rate cut expected from the Federal Reserve (Fed), supporting the rise of the greenback.
Donald Trump’s announcements concerning the implementation of new customs taxes on imports into the United States are having an amplifying effect on the rate situation. The probable increase in inflation would further limit the Fed’s attempts to ease and improve the dollar’s positive carry – deviation from the US interest rate.
The path therefore seems clear for a year of 2025 of appreciation of the American currency, but the analysis is missing certain moderating elements. In its evolution, the behavior of other central banks is a key factor. However, market expectations are changing in this area: the rate expectations of the European Central Bank (ECB) for 2025 have gone from 1.75% to 0.90% and those of the Bank of Japan (BoJ) have increased by 0.25% to 0.50%.
-In addition, the advent of the new customs order in the United States should also lead to a global acceleration of inflation, further limiting the ability of issuing institutions to reduce the cost of money. Enough to reduce the upward potential of the dollar, once the announcement effects and the effective arrival of the new administration in the White House have passed.
Finally, if a strong dollar corresponds to the credo of the American presidency, what about an expensive dollar? The strength of the greenback lies in its status as an international trade currency and reserve currency. Donald Trump confirmed this perception by ordering the Brics (Brazil, Russia, India, China and South Africa) to retain the dollar for their trade. On the other hand, an expensive dollar poses a problem for exports by reducing the competitiveness of “made in USA” products, hampering economic growth and sowing doubt among stock market investors. The new presidency will surely try to avoid a surge in its national currency as well as a sudden return of inflation. Reflections on the progressiveness of the implementation of customs measures go in this direction. This is also enough to somewhat attenuate the bullish outlook for the dollar this year.
Thus, the latter could well surprise at the start of the year and test psychological milestones such as parity with the euro. In the longer term, however, we should instead expect the value of the greenback to stabilize at slightly lower levels.
