(Bloomberg) — The dollar is on track for its best year in nearly a decade as U.S. economic strength dampens expectations for a Federal Reserve rate cut cycle and President Donald Trump's tough threats of tariffs strict is the basis for bullish bets on the currency.
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The Bloomberg Dollar Spot Index rose more than 7% so far this year, the best run since 2015. All developed world currencies weakened against the greenback 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, foreign exchange strategist at Barclays. “That strength means the Fed is consolidating on a shallow cut cycle that leaves rates in the US higher than elsewhere, helping to sustain historically higher dollar valuations.”
The dollar gauge touched its strongest level in more than two years earlier this month when the Fed cut interest rates but signaled a slowdown in the pace of monetary easing. However, as 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.
In 2024 so far, the yen, Norwegian krone and New Zealand dollar have been the worst performers in the Group of 10, with each falling more than 10% against the greenback as of December 27. The euro has lost around 5.5 % to trade near $1.04, with an increasing number of strategists seeing the risk that the common currency will reach parity with the dollar next year.
The Bloomberg Dollar Spot Index rallied slightly ahead on Friday to cap a fourth week of gains, rising alongside longer-term Treasury yields as traders appraised the Fed's monetary path and incoming Trump administration policies.
Speculative, non-commercial traders have consistently boosted bullish dollar bets in the run-up to and since the US election. They now hold about $28.2 billion in contracts tied to future increases in the greenback, the most since May.
“Current dollar strength is consistent with incoming data, we do not believe markets have fully incorporated our tariff expectations, and risks to our outlook remain on the upside in the medium term,” Goldman Sachs analysts led by Kamakshya Trivedi wrote in a note on December 20. “Especially if stronger sentiment translates into more durable US growth despite more protectionist measures.”
(Updates levels, Bloomberg dollar index.)
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