- The US currency had a strong finish to 2024.
- The Federal Reserve projected fewer-than-expected rate cuts in 2025.
- Trump’s presidential win changed the outlook for the US and other major economies.
Most currency futures eased on Thursday as the dollar started the year strong. Earlier in the session, there was some relief as the dollar fell. However, it resumed last year’s rally when investors refocused on the looming US administration change. At the same time, the less dovish outlook for the Fed in 2025 helped support the greenback.
Dollar Index (Source: Bloomberg)
The US dollar had a strong finish to 2024 after the Federal Reserve projected fewer-than-expected rate cuts in 2025. For most of the year, market participants had looked forward to Fed rate cuts since inflation was on a downtrend to the 2% target. However, in the latter part of the year, it became clear that inflation had paused its decline. At the same time, the US economy remained resilient, with most economic reports coming in well above estimates.
Consequently, Fed policymakers slowly assumed a cautious stance. Meanwhile, markets gradually adjusted the outlook for rate cuts. However, it was still not as big an adjustment as when the Fed met in December. Policymakers forecasted only 50-bps of rate cuts this year, a significant downgrade from September, when the central bank predicted 100-bps. The shift was a big boost for US Treasury yields and the dollar.
On the other hand, currency futures collapsed. Most other major central banks, like the European Central Bank and the Bank of Canada, were charting aggressive rate-cut paths. At the same time, other major economies were performing poorly compared to the US, and forecasts showed continued weakness.
Trump will take office in January. His presidential win changed the outlook for the US and other major economies. Moreover, his policy proposals on tax cuts and tariffs on imported goods will increase demand in the US and boost growth. At the same time, it will likely lead to a spike in price pressures. This future creates a bullish outlook for the greenback.
Meanwhile, tariffs on imported goods from the Eurozone and Canada will likely hurt these economies. Notably, Canada relies heavily on exports to the US, with almost 75% of its goods exported to the US. Meanwhile, Trump has threatened to impose a 25% tariff on these goods. Such an outcome would reduce demand for these goods. Therefore, it would pressure the BoC to lower borrowing costs, weakening the CAD.
