US Fed And Trump Trade Drive Dollar To Best Quarter Since 2016

The US dollar is experiencing a remarkable resurgence, poised to record its best quarter in eight years. This surge can be attributed to a combination of factors including a strong US economy and a hawkish stance from the Federal Reserve.

The Bloomberg Dollar Spot Index has surged by 6.3% since the end of September, marking its strongest performance since late 2016, a period that also saw significant political shifts in the US with the election of President Donald Trump.

Even though the dollar index experienced a slight decline of 0.4% recently after news of cool inflation data, the overall trajectory for the dollar remains positive. Analysts suggest that ongoing robust domestic growth, a solid labor market, and persistent inflation above the Federal Reserve's 2% target are keeping the dollar's momentum strong. Following a recent meeting, US rate-setters adjusted their expectations for monetary easing in the upcoming year, which had a positive impact on the dollar.

Positive Outlook for the Dollar

According to analysts from HSBC, the current economic and monetary backdrop is favorable for the dollar, with no foreseeable conditions that could undermine its strength in 2025. They believe these factors are “hitting all the right notes” for the currency's continued strength.

Aroop Chatterjee, a strategist at Wells Fargo, asserts that Trump’s policy agenda, particularly regarding trade tariffs, is likely to continue strengthening the dollar. His outlook suggests that the “Trump trade, immigration, and fiscal policies may substantially shift the macro backdrop further in favor of the dollar.”

Global Economic Landscape

The strength of the US economy becomes even more pronounced when compared to the sluggish growth seen in many other developed nations. This contrasting performance is advantageous for the dollar, making it a preferred currency for investors.

Nathan Thooft, a senior portfolio manager at Manulife Investment Management, emphasizes that there is a need for signs of economic improvement globally, but unfortunately, the indicators so far are not encouraging.

In the realm of speculative investments, non-commercial players, including hedge funds and asset managers, have increased their bullish positions on the dollar to levels not seen since May. Paula Comings, head of FX sales at U.S. Bancorp, noted that there is a prevailing consensus among clients about the dollar's strong position in the short term, though some uncertainties loom in the medium term related to trade deficits and fiscal outlook.

Dollar, Economy, Federal