The US dollar is on a tear, and Wall Street expects the rally to keep going. After climbing 6.1% since October, the dollar is having its strongest quarter since the Federal Reserve’s interest rate hikes in 2022.
Traders are eyeing further gains next year, despite President-elect Donald Trump’s push for a weaker currency. The dollar has strengthened from $1.11 against the euro in early October to below $1.05. Deutsche Bank forecasts parity—$1 to €1—by 2025.
More than half of major banks surveyed, including Goldman Sachs, UBS, and Morgan Stanley, predict the greenback will remain robust. Trump’s hopes for a weaker dollar to help US exporters? Not likely, analysts say.
Trump’s policies may fuel dollar strength
Trump has repeatedly called the dollar’s strength a “big problem” for American companies. In July, he said, “That’s a tremendous burden on our companies that try and sell tractors and other things to other places outside of this country.”
During his first term, he even labeled China a “currency manipulator” amid trade tensions. Despite this rhetoric, analysts believe Trump’s pro-growth policies will only strengthen the currency.
Trump’s plans for import tariffs, tax cuts, and an inflationary boost to domestic demand are seen as dollar-positive.
Higher inflation could force the Fed to keep interest rates elevated, attracting foreign capital into dollar assets. Barclays expects the dollar to inch up to $1.04 against the euro by the end of next year.
Global dynamics limit Trump’s control over the US dollar
Despite Trump’s desire to devalue the dollar, the mechanics are complicated. Analysts rule out a “Plaza Accord” repeat—similar to the 1985 deal when countries intervened to weaken the dollar. Mark Sobel, a former US Treasury official, says support for a so-called “Mar-a-Lago Accord” is unrealistic.
“Perceptions about US leverage over China are woefully exaggerated,” he explained. Beijing is unlikely to agree to engineered devaluation.
Brad Setser, another former Treasury official, says the 1985 Plaza Accord worked because US rates were already falling. “The macroeconomic backdrop, with interest rate differentials that favor the dollar versus the euro and the yuan, isn’t conducive to a weak dollar.”
Right now, the Fed’s stance and global capital flows strongly support the greenback. Even with Trump pushing against it, the dollar’s fundamentals remain strong.
Analysts believe weakening it would require measures like reducing the government deficit or forcing trade allies into currency agreements—highly unlikely paths. Franklin Templeton says, “It’s not clear to me that he can actually run around screaming about how the euro is too weak against the dollar.”
Market pricing and recent dollar movements
The dollar’s rally has taken a brief pause in recent weeks. The Dollar Index, which measures the greenback against major currencies, is trading around 106.8, down from highs above 108 late last month. But this doesn’t signal the end of the rally.
The stronger dollar creates challenges for exporters but benefits foreign investors. The higher the Fed keeps rates, the more attractive dollar-denominated assets become. Analysts agree: Trump’s economic agenda—whether intentional or not—will keep the dollar climbing.
For investors, the dollar remains a safe bet. Analysts largely dismiss Trump’s rhetoric. Currency strategies hinge on interest rate differentials, trade policies, and global capital flows. None of these favor a weaker dollar.
The Federal Reserve remains the central player in the dollar’s outlook. If inflation rises, the Fed may hold rates steady or even hike further. That’s a direct pull for global capital, keeping upward pressure on the greenback.
The market has priced in a near-certain 25 basis point cut by the Fed next year. Even if the dollar rally slows, analysts don’t expect a reversal.
Economic effects of a strong dollar
The dollar’s strength is already affecting financial markets. On Wall Street, the Dow Jones fell 0.25% for its eighth consecutive day of losses—the longest losing streak since 2018. The S&P 500 climbed 0.38%, and the Nasdaq rose 1.24%, hitting a new high.
In Europe, France’s CAC 40 dropped 0.71% after Moody’s downgraded the country’s credit rating. Tech stocks are also in focus. Nvidia shares dipped 1.7% on Monday, closing at $132.
The stock is now down 11% from its November peak but remains up 166% year-to-date. Meanwhile, other chipmakers like Broadcom continue to post gains, indicating sector strength despite Nvidia’s dip.
SoftBank CEO Masayoshi Son also made history when he announced a $100 billion investment plan in the US over the next four years. The deal includes creating 100,000 jobs focused on AI and infrastructure.
Bitcoin, though, broke two all-time highs just yesterday. It was trading at $106,622 at press time.
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