Rolling back the dollar’s near 50% rise over the past 15 years was a pillar of Donald Trump’s economic agenda. Now that early success has fizzled, markets suspect last year’s 7% drop may be it. As the US president heads to the World Economic Forum in Davos this week and celebrates the anniversary of his second inauguration, the mood around the greenback seems to have turned – even among some of last year’s biggest bears.
The reasons are relatively straightforward. Fears early last year of foreign capital flight from US markets amid trade, economic policy and geopolitical upheavals never really materialized. A wave of currency hedging also faded.
US growth actually accelerated and the dollar’s interest rate premium held up for the most part. And even Trump’s renewed campaign over Federal Reserve independence early this year has had little major exchange rate fallout – largely because it has not shifted market assumptions about the Fed’s long-term policy path. The upshot was that after its worst first half of any year in the floating exchange rate era, the dollar’s index against the major currencies found its footing by midyear and rebounded about 2% from the lows.
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Measured more comprehensively to account for broad US trade exposure and inflation dynamics, the dollar’s real effective exchange rate index gave back just 7% of the 47% gains clocked between 2011 and the end of 2024. The relentless dollar gains of the past decade were largely driven by a long period of US economic and stock market outperformance against most other rich-world economies. That advantage is proving hard to shake, even in the face of Trump’s disruptive domestic and global policy approach.
US GDP ended the year growing at an annualised rate of more than 4%, and upgraded World Bank forecasts for 2026 now put US growth at 2.2% – more than twice the pace expected for the euro zone or Japan. S&P 500 earnings growth forecasts for next year are now above 15%, about four percentage points faster than the equivalent for the euro zone STOXX. With that US edge back, consensus dollar forecasts have flattened.
A Reuters poll this month put the median one-year euro/dollar forecast at 1.20, implying only about 3% further dollar weakness from here. Societe Generale’s currency strategist Kit Juckes reckons the only plausible way back to a dollar-negative environment is if US equity indices suffer a significant correction and put the brakes on growth. That concern, prevalent for much of last year, now looks distant as the new year kicks off.
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