As of December 16, 2024, the U.S. dollar is navigating a complex landscape following Donald Trump's election victory on November 5, 2024. The dollar initially surged approximately 2% post-election, reflecting optimism among dollar bulls. However, December has historically posed challenges for the dollar, with declines in eight of the last ten years due to year-end portfolio rebalancing and the so-called Santa Rally [f5f34c47].
The Bloomberg Dollar Spot Index has risen 6.3% in 2024, indicating a strong dollar, particularly as the dollar has strengthened 5% against the euro this year. The current interest rate set by the Federal Reserve is over one percentage point higher than that of the European Central Bank (ECB), and market expectations suggest this gap could exceed two percentage points in 2025 [fedd72e4].
Wall Street analysts are beginning to turn bearish on the dollar, anticipating that Trump's policies, particularly new tariffs, combined with expected interest-rate cuts from the Federal Reserve, could pressure the currency significantly by late 2025 [b347e420]. Analysts, including Vishnu Varathan, caution that unpredictable swings in the dollar's value may occur, particularly influenced by Trump's active presence on social media [f5f34c47].
In a recent analysis, Morgan Stanley has advised investors to sell the U.S. dollar, citing overly optimistic future value expectations. Analyst David Adams argues that much of the positive outlook for the dollar has already been priced in. He notes that while Trump's administration, set to begin in January 2025, promises new tariffs, these may not be implemented as quickly or broadly as anticipated [a5f52329].
Societe Generale predicts a 6% decline in the ICE US Dollar Index by the end of 2025, reflecting concerns that U.S. yields are expected to fall faster than global yields, compressing the dollar's advantages [b347e420]. Despite Morgan Stanley's bearish stance, major financial institutions such as JPMorgan, Goldman Sachs, and Citigroup predict continued strength for the dollar, driven by persistent inflation and the potential for new tariffs [f5f34c47]. Morgan Stanley recommends purchasing Australian dollars and British pounds, predicting appreciation against the U.S. dollar, with target prices set at $1.32 per £1 and AU$ 0.675 per $1 [a5f52329].
As traders prepare for the Federal Reserve's crucial mid-December meeting, which could significantly impact currency bets, the dollar's trajectory remains closely tied to upcoming economic indicators and geopolitical developments. Analysts warn that Trump's trade policies could negatively impact the dollar, similar to the significant drop observed in 2017 following his election. Speculative traders currently hold long positions on the dollar amounting to $24 billion, but the risks of a widening budget deficit and increased bond term premium loom large [b347e420][afbd749b][7aa18773].
Overall, the widening interest rate gap between the U.S. and the Eurozone, coupled with Trump's anticipated tariffs, could exacerbate inflation and further influence the dollar's strength in the coming year [fedd72e4].