Outlook

The consensus expects the dollar to outperform again in 2025, and there are good reasons to stick with the herd. The US economy is demonstrating remarkable resilience, defying expectations for a policy-induced slowdown. Household balance sheets remain solid, labour markets are tight, and real disposable income is climbing—bolstering consumer spending. A supportive fiscal stance, coupled with advances in artificial intelligence, is enhancing corporate profitability and spurring business investment. Household balance sheets look remarkably strong.Net foreign portfolio investment, 24-month rolling sums, trillions USDJanuary 1981 – September 2024 This strong growth backdrop, combined with structural factors including an aging population, persistently-wide deficits,...

Both Donald Trump and JD Vance have expressed a desire to weaken the dollar, but deliberate efforts to achieve this look unlikely to succeed: Fiscal tightening, which could weaken growth and lower relative interest rates, appears improbable given the incoming administration’s focus on tax cuts and sustained government spending.  The Federal Reserve is legally and structurally insulated against interference, making it unlikely to depress interest rates at the president’s behest. Further, any serious threat to the central bank’s independence is highly likely to drive market inflation expectations and long-term interest rates higher, offsetting any negative impact on the dollar.  Unilateral...

Starting conditions today differ starkly from 2017. Government finances are far more stretched, limiting the scope for new fiscal stimulus. Inflation remains somewhat elevated, forcing the Federal Reserve to maintain tighter monetary policy. Higher interest rates are biting: job creation has slowed, the housing market has weakened, and businesses are cutting back on investment.  Government finances are already stretched. Budget surplus or deficit, % share of gross domestic product1980 – 2024 Investors are already wary of a renewed immigration crackdown that could drive up labour costs, eroding corporate profits. Another trade war might compound inflation while denting consumer spending. Trading...

The US dollar is poised for a promising start to 2025, buoyed by a confluence of supportive factors. Strong domestic fundamentals, a relatively-hawkish Fed, optimism surrounding Donald Trump’s electoral victory, and a weak economic backdrop in the rest of the world should underpin incremental gains.  But the honeymoon is unlikely to last. The delayed impact of the Fed’s aggressive post-pandemic tightening is already hitting housing market activity, and labour markets are cooling. After a long period of surprisingly strong growth, consumer demand seems likely to slow, and heightened policy uncertainty stemming from Trump’s unpredictable agenda could erode business confidence, weakening...