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Dollar gains as Fed rate-cut rethink fuels best year since 2015

A seller counts US dollar banknotes during a food wholesale event at Plaza Centenario in Quezaltepeque, La Libertad department, El Salvador, on Tuesday, July 9, 2024. (Camilo Freedman/Bloomberg)
By Anya Andrianova Bloomberg

The U.S. dollar rose Tuesday, capping its strongest yearly advance in nearly a decade as the solid U.S. economy and President-elect Donald Trump’s tax-cut and tariff policies promise to keep interest rates elevated.

The gain drove the Bloomberg Dollar Spot Index to the highest since November 2022. It has risen nearly 8% this year, the most since 2015, after the surprisingly resilient expansion drove traders to dial back expectations for how much the Federal Reserve will ease monetary policy.

Analysts have indicated that the dollar rally has room to continue into early next year after Fed officials signaled caution about further interest-rate reductions, breaking with other central banks that are expected to dial back rates more quickly. That’s given investors an incentive to shift cash to the U.S., which has pushed up the currency.

The dollar advanced against all of its major peers in 2024, with the New Zealand dollar, Norwegian krone and Japanese yen weakening the most against the U.S. currency.

“Many of Trump’s initial policies will be bullish for the dollar in early 2025,” said Jayati Bharadwaj, a currency strategist at TD Securities. “In the second half of next year, we expect the Fed to resume easing which can provide a pivot for the dollar strength, especially if other central banks are already on pause.”

A group of market players – including hedge funds and asset managers – have increased aggregate bets on the dollar’s rise to some $29.8 billion, according to data compiled by Bloomberg. That’s the most bullish positioning toward the U.S. currency since April.

Still, there’s some doubts about how much further the dollar will run, given the scale of its gains and the fact that the slower pace of interest-rate cuts is largely priced into the market.

“We are moderately bullish the greenback,” said Sarah Ying, head of currency strategy at CIBC Capital Markets in Toronto. “Most of the Fed path is already priced in and we suspect dollar momentum should lose some steam in the second quarter.”