(Kitco News) - The U.S. dollar has started the new year on very strong footing, with the U.S. Dollar Index pushing above 109 points to its highest level since November 2022.
Looking ahead, many analysts expect further gains for the greenback as a robust economy forces the Federal Reserve to navigate a shallower easing cycle through 2025.
“Simply put, the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar,” said currency strategists at Brown Brothers Harriman in a recent note. “We expect these trends to continue in 2025. Strong data should carry over into Q1, meaning the dollar, U.S. yields, and U.S. equities are likely to march higher.”
Jonas Goltermann, Deputy Chief Markets Economist at Capital Economics, also expects American exceptionalism to play a major role in the U.S. dollar’s strength in the new year. He added that perceptions of America’s resilient economy are built on a solid foundation.
“The U.S. economy has weathered the shocks of the past few years considerably better than its peers, and the FOMC is consequently in a position to keep policy rates higher than elsewhere. Additionally, we expect the AI-driven surge in the S&P 500 to outpace other major equity markets by some margin,” he said.
The U.S. dollar has seen solid momentum since mid-August after holding critical support at 100 points. Bullish sentiment in the marketplace has only grown since the U.S. election in November. President-elect Donald Trump’s ‘America-First’ policies are driving expectations of a resurgence in U.S. manufacturing, further supporting economic growth.
At the same time, Trump’s policies are also expected to drive inflationary pressures, forcing the Federal Reserve to slow its easing cycle. In its final monetary policy meeting of 2024, the U.S. central bank signaled it expects to cut interest rates only twice this year. In September, the Federal Reserve anticipated four rate cuts in 2025.
While the Federal Reserve is forecasted to slow its easing cycle, the same cannot be said for other central banks. Analysts predict a new divergence in global monetary policy that will also support the greenback. The largest component of the U.S. Dollar Index is the euro, and analysts expect the European Central Bank to ease interest rates to support the region’s economy as inflation pressures continue to subside.
However, not all analysts are optimistic that the U.S. dollar can maintain its current pace. Currency analysts at Bank of America expect strong momentum for the U.S. dollar in the first half of the year, but slower economic growth may eventually take a toll.
“We expect the USD to remain strong in the short term, supported by U.S. inflationary policies and tariffs, but to weaken later in the year as these policies strain the U.S. economy while the rest of the world adjusts,” the analysts said in their 2025 outlook report.
“Our end-2025 EUR/USD forecast is 1.10. This assumes the U.S. economy eventually slows, with some negative effects from trade protectionism taking hold. It reflects a very gradual move of EUR/USD towards its much higher long-term equilibrium, above 1.20. We also note that the USD's post-election strength has so far mirrored the pattern following the 2016 election. Back then, the USD strengthened further by year-end but weakened sharply, falling well below pre-election levels in 2017,” the analysts added.
Looking at gold, market analysts see a contrasting trend compared to the U.S. dollar. Analysts have said that strong momentum in the greenback will create headwinds for gold through the first half of the year.
However, despite these challenges, analysts still expect gold prices to rally to $3,000 per ounce by year-end.
While bullish momentum is expected to keep gold in a consolidation pattern during the first half of the year, analysts do not anticipate any significant weakness in the precious metal.
Some analysts have noted that the negative correlation between the U.S. dollar and gold has weakened as central banks continue to purchase gold at an unprecedented pace.
In a recent interview with Kitco News, George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors, stated that gold remains an attractive safe-haven asset for central banks as they diversify away from the U.S. dollar.
Some analysts argue that Trump’s proposed tariffs represent a new dimension in the U.S. government’s weaponization of its currency, which could accelerate the ongoing de-dollarization trend among emerging market central banks.
“Central banks, primarily in emerging markets, have absorbed more than 15% of total end-user demand, and that trend could continue for the next 14 years,” said Milling-Stanley.
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