The dollar is poised for its best performance in nearly a decade as strong economic conditions in the US dampen expectations for a rate-cutting cycle by the Federal Reserve. Furthermore, President-elect Donald Trump’s threats of substantial tariffs bolster optimistic projections for the currency.

This year, the Bloomberg Dollar Spot Index has surged by more than 7%, marking its best results since 2015. All currencies from developed nations have weakened against the dollar as central banks intervene to strengthen their local economies.

Skylar Montgomery Koning, a foreign-exchange strategist at Barclays, stated, “The primary driver of the US dollar’s strength this year has been the robustness of the economy. This strong performance implies that the Fed is likely to adopt a gradual rate-cutting approach, keeping US rates higher than those of other nations, which helps maintain historically elevated dollar values.”

Earlier this month, the dollar index climbed to its highest point in over two years when the Fed cut interest rates, while signaling a slower monetary easing pace. However, with Wall Street investments indicating the dollar could appreciate further in 2025, expected global economic growth later this year could support other currencies, exerting pressure on the dollar.

As of December 27, the yen, Norwegian krone, and New Zealand dollar have been the worst performers among the Group of 10, each dropping over 10% against the dollar. The euro has weakened by about 5.5%, trading around $1.04, with an increasing number of strategists alerting to the possibility of the euro reaching parity with the dollar next year.

On Friday, the Bloomberg Dollar Spot Index slightly increased, marking the end of a fourth consecutive week of gains, rising alongside long-term Treasury yields as traders evaluate the Fed’s monetary policy and the incoming Trump administration’s strategies.

Speculative traders, excluding commercial participants, have continuously raised their bullish bets on the dollar ahead of and following the US election. They currently possess about $28.2 billion in contracts anticipating the dollar’s future increase, the highest since May.

According to a note dated December 20 by Goldman Sachs analysts led by Kamakshya Trivedi, “The current dollar strength aligns with incoming data. We believe that markets have not fully factored in our tariff expectations, and the risks to our forecasts still lean upwards in the medium term, particularly if improved sentiment fosters more sustainable US growth despite the rise in protectionist policies.”

© 2024 Bloomberg

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