Trump’s policies are set to trigger further strengthening of the US Dollar (USD), with European currencies, particularly the Euro (EUR), facing pressure from protectionism and monetary easing. According to ING’s FX analyst Francesco Pesole, emerging market currencies are also expected to have a challenging year. The USD has historically been strong in January and February, and this trend is expected to continue. Despite a strong performance in December, with DXY breaking a seven-year losing streak, the USD is likely to maintain its strength in the face of potential economic headwinds.
The President-elect’s vocal stance on protectionism and fiscal stimulus has already been factored into market expectations, contributing to the current strength of the dollar. Unless there is a significant shift in Trump’s rhetoric before his inauguration on January 20, the USD is expected to remain solid at the beginning of the year. However, the risk of a Plaza Accord 2.0, which could artificially devalue the dollar, remains a concern for the currency’s stability. The USD is expected to have a solid base of support as long as Trump maintains his current stance on economic policies.
US economic indicators, such as jobless claims and the ISM manufacturing index, will play a significant role in shaping market sentiment towards the USD. While jobless claims slowed in the last week of 2024, the ISM manufacturing index for December will provide further insight into the health of the US manufacturing sector. Consensus forecasts suggest a contraction in the index, which could impact the USD’s performance in the short term. Despite potential corrections in the USD, factors such as economic growth concerns and rising gas prices are expected to support the currency against European counterparts.
Overall, the macro and political landscape points towards further strengthening of the USD, with a target of 110.0 in DXY. The combination of Trump’s policies, market expectations, and economic indicators are likely to underpin the USD’s position in the global currency market. While European currencies may face challenges due to protectionism and monetary policies, the USD is expected to maintain its strength amidst a potentially volatile environment. Investors should keep a close eye on key economic indicators and political developments to gauge the future direction of the USD and other major currencies.
