Since the third quarter of this year, the US dollar exchange rate has clearly strengthened and is expected to record its best performance in nearly a decade.
The specific market situation shows that the Bloomberg US dollar spot index has accumulated over 7.4% since the beginning of the year. The last time there was such an annual increase was in 2015, when it accumulated 9%. In 2022, the Bloomberg US dollar spot index rose by 6.2%.
As of press time, the US dollar index, which measures the US dollar against six major currencies, stands at 108.36 and is expected to close above 108 for the first time since 2003. Since the beginning of the year, the US dollar index has risen by 6.6%, lagging behind the 8.20% increase in 2022 and the 9.32% increase in 2015.
Analysis suggests that US economic indicators have suppressed market expectations for the Federal Reserve's interest rate cuts, and US President elect Donald Trump has threatened to impose severe tariffs after taking office, supporting bullish bets on the US dollar.
Barclays Bank's foreign exchange strategist stated that the main pillar supporting the US dollar since the beginning of the year has always been the performance of the economy. For the Federal Reserve, this means a "shallow" interest rate cut cycle, which will make US interest rates higher than other regions and help maintain the high level of the US dollar.
Last week, the Federal Reserve released its latest economic outlook forecast when announcing its decision, with 10 out of 19 members of the Federal Open Market Committee (FOMC) believing that the target range for the federal funds rate would fall to between 3.75% and 4% by the end of 2025.
Based on a 25 basis point rate cut each time, the Federal Reserve may only cut interest rates twice next year, which is a significant contraction from the previously expected four cuts. Chairman Powell mentioned at the press conference that the monetary policy stance has significantly reduced its restrictive nature, and slowing down the pace of adjustment is appropriate.
The outside world also believes that Trump's proposed tax cuts and tariffs are likely to trigger domestic inflation in the United States. In this environment, the Federal Reserve may need to maintain higher interest rates for a longer period of time to provide support for the US dollar.
Goldman Sachs analysts wrote in a report last week, "We believe that the market has not fully incorporated our expectations for potential tariffs from the United States. In the medium term, we expect the US dollar to still face upward risks
At the same time, other major central banks have implemented or are preparing to implement more aggressive monetary easing policies (than the Federal Reserve) to support the local economy, resulting in a significant weakening of their currencies against the US dollar, thereby supporting the continued strength of the US dollar.
Of particular note is the Bank of Japan. Although the bank has entered the track of monetary tightening, Kazuo Ueda is particularly cautious about when to raise interest rates next due to concerns about financial market volatility similar to the "Black Monday" in early August this year.
Since the beginning of the year, among the G10 currencies, the Japanese yen, Norwegian krone, and New Zealand dollar have performed poorly, all falling more than 10% against the US dollar. The euro has fallen 5.5% against the US dollar and is now trading around 1.04. More and more strategists believe that the euro may fall to parity with the US dollar (i.e. 1:1 exchange rate) next year.