US Fed and Trump Trade Drive Dollar to Best Quarter Since 2016

The US dollar is set for its strongest quarterly performance in eight years, having reached a two-year high this week. This surge is attributed to a robust US economy coupled with a hawkish stance from the Federal Reserve, enhancing the dollar's attractiveness to investors.

Since the end of September, the Bloomberg Dollar Spot Index has jumped by 6.3%, marking its best quarter since Donald Trump won the presidential election in 2016. The dollar experienced a slight dip of 0.4% on Friday following new data that indicated the Fed's preferred measure of underlying inflation was lower than anticipated.

Despite this, the dollar continues to trend toward its best annual performance since 2015, driven by solid growth within the US, a healthy labor market, and persistent inflation above the Fed's 2% target. These factors led US policymakers to lower expectations for monetary easing in the coming year, consequently boosting the dollar's strength.

Positive Outlook for the Dollar

Analysts at HSBC noted that the current economic conditions are "hitting all the right notes" for the dollar, suggesting they do not foresee any factors that could lead to a decline in its value through 2025. Aroop Chatterjee, a strategist at Wells Fargo, has shared a similar viewpoint, anticipating that Trump's policy agenda, including significant trade tariffs, will further enhance the dollar's strength.

Chatterjee mentioned that Trump's trade, immigration, and fiscal policies could meaningfully alter the macroeconomic environment, favoring the dollar.

Global Economic Context

The US economy is distinguishing itself positively, especially when many advanced economies are grappling with sluggish growth. This disparity is proving beneficial for the dollar. Nathan Thooft, a senior portfolio manager at Manulife Investment Management, commented that there needs to be evidence of recovery in other parts of the world, yet such indicators are currently lacking.

Moreover, recent data from the Commodity Futures Trading Commission revealed that non-commercial investors, which include hedge funds and asset managers, have increased their dollar long positions to the most bullish levels seen since May.

Paula Comings, head of FX sales at U.S. Bancorp, reflected a consensus among clients about the dollar's strength in the short term. She noted expectations for a stronger dollar are prevalent, although uncertainties surrounding the trade deficit and fiscal outlook could pose challenges in the medium term.

As the dollar approaches the end of the year strong and resilient, all eyes will remain on forthcoming economic data and the Federal Reserve's policy decisions, which will influence currency strength heading into 2025.

Dollar, Fed, Trump