Dollar’s Trump-Fueled Gains Face a Reality Check Late 2025

(Bloomberg) -- Wall Street is starting to sour on the dollar as President-elect Donald Trump’s policies and the Federal Reserve’s interest-rate cuts will likely put pressure on the greenback in the latter portion of 2025.

From Morgan Stanley to JPMorgan Chase, roughly a half dozen sell-side strategists, are now forecasting the world’s reserve currency will peak as early as mid next year before starting to decline, with Societe Generale seeing the ICE US Dollar Index falling 6% at the end of next year. 

The dollar has already soared this year, on track for the biggest rally since 2015, thanks to Trump’s victory in the US presidential election and as strong economic data prompted traders to reduce their forecasts for the number of Fed rate cuts next year.

The greenback’s strength has been “stomach churning,” said Kit Juckes, the head of currency strategy at Societe Generale. “We’re driving the price of an asset up to something that is not sustainable over the long-term.”

The Bloomberg Dollar Spot Index has risen some 6.3% so far this year, with a good part of those gains coming in the run-up to and since election day in early November. The rally has been fueled by expectations that Trump’s tariffs and tax cuts will fan inflation and complicate the Fed’s mission to lower rates in the months ahead. That’s provided global investors an incentive to shift money to the US.

While Morgan Stanley’s macro and currency strategists including Matthew Hornbach and James Lord see the dollar getting a boost from those threats, ultimately the dollar will dip below current levels by this time next year, they wrote. The combination of falling real rates in the US and improved risk appetite combine for the most bearish of greenback scenarios, they added. 

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For now, Trump has been ramping up his hawkish rhetoric on trade, most recently sending the Mexican peso and Canadian dollar sliding after he pledged tariffs of 25% on Mexican and Canadian goods over migrant and drugs-related border issues. Earlier this month, Trump took a jab at a group of emerging economies for challenging the dollar’s status as the world’s premier currency. 

All of the recent strength in the greenback has led to weakness across non-dollar currencies. The euro fell to a two-year low in November after the US election, nearing parity. MSCI Inc.’s emerging-market currency index now trades at the lowest in four months while China might devalue the yuan to 7.50 next year — a level last seen in 2007 — according to a news report last week.

Any resolutions to possible trade wars under a second Trump administration will disappoint dollar bulls, many of whom have piled into long positions on the view that the president-elect’s views on trade inherently support the greenback, according to Citigroup strategists led by Daniel Tobon.  

Speculative, non-commercial traders are still long the dollar by some $24 billion — near the most since May — according to data compiled by Bloomberg based on Commodity Futures Trading Commission data for the week ended Dec. 10. That group has been bullish since mid-October ahead of the election.

Looming Threats

When it comes to looking at the dollar’s path under a Trump presidency, history offers some guidance. After a supercharged run immediately following Trump’s election eight years ago, 2017 saw the biggest annual drop on record for the Bloomberg dollar index as the US economy lost momentum while growth picked up in Europe.

This time around, Wall Street doesn’t think the drop will be as dramatic, but the dollar may peak in the first half of 2025, said MUFG analysts led by Derek Halpenny.

Even the options markets, which are still pricing dollar gains next year, have trimmed their bullish expectations somewhat, compared with the euphoria of appreciation in November after Trump’s victory. 

One-year risk reversals on the Bloomberg dollar benchmark trade around 1% in favor of calls this week, down from a four-month high about a month ago, revealing traders are still looking for the greenback to gain but bullishness has stalled. 

For Sophia Drossos, a strategist and economist at Point72 Asset Management, so much positive news is priced in the dollar that growth anywhere outside of the US — in particular Europe where the European Central Bank and the Bank of England are cutting rates to help mitigate downside risks — will weaken the greenback in relation to its peers. 

“There’s some good building blocks for a strong global economy next year,” said Drossos.

Top currency strategists expect the dollar’s largest source of support in recent months — the Fed — will turn into a liability further into 2025.

US yields are expected to fall faster than those in the rest of the world next year, according to the Morgan Stanley rates strategists, which would compress the differentials that have long been working in the greenback’s favor.

Still, a weaker dollar is far from a universal consensus on Wall Street. 

At Wells Fargo, strategists see relative central bank policies around the world supporting, not dragging, the dollar. They expect that the greenback will appreciate some 5% to 6% against Group-of-10 peers in 2025, they wrote in a year-ahead note to clients.

“Monetary policy will be the primary source of dollar strength next year,” said Brendan McKenna, an emerging-markets economist and foreign-exchange strategist at Wells Fargo in New York. “We have the view that the Fed will shift in a less dovish direction, while other major central banks like the European Central Bank are set to become more dovish.” 

Other experts, meanwhile, see risks to further dollar strength from Trump’s trade policies if they do get enacted, since tariffs would theoretically jolt prices higher for any imported goods used by US manufacturers.

“If tariffs make steel and aluminum more expensive, that’ll be a negative supply shock for the onshore auto industry that use those imported inputs,” said Barry Eichengreen, an economist at the University of California at Berkeley who has spent decades studying the global monetary system.

Then there is the threat of a widening budget deficit and increased US bond term premium, the measure of the perceived risk of holding long-term government debt.

“When the Fed does ease considerably and the dollar loses its relative yield/growth advantage, dollar weakness could be outsized,” JPMorgan analysts led by Meera Chandan, co-head of global FX strategy, wrote in their 2025 outlook.  

What to Watch

(Updates charts and prices, adds Wells Fargo comment.)

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