Dollar Kicks Off the New Year at Its Highest Level in Two Years

The impact of U.S. President Donald Trump's growth-promoting policies on the markets and inflation expectations continue to support the demand for the dollar. Last year, the dollar's high yield and safe-haven characteristic led to a dominant performance in global currency markets. The wide interest rate gap between the U.S. and other economies has led most currencies to depreciate against the dollar throughout 2024. Notably, the Japanese yen has exhibited its weakest performance in four years, declining by more than 10%. On the first day of the new year, the dollar lost 0.25% against the yen, falling to 156.6. After surpassing 158 yen at the end of December, the dollar had reached its highest levels in the last five months.

On the first trading day of the new year, the dollar reached its highest level against five major currencies since November 2022. The DXY rose by 0.3% during the day, reaching 108.83. The euro continues to weaken, falling to 1.0314 dollars, its lowest level against the dollar since 2022. Trading above 1.12 dollars in September, the euro has weakened by 8% since then. The expectation that the European Central Bank (ECB) will continue rate cuts throughout 2025 is one of the significant factors increasing pressure on the euro. While markets are pricing in a 113 basis point rate cut by the ECB, only a 42 basis point easing is expected from the U.S. Federal Reserve. This situation creates an interest rate differential in favor of the dollar, leading to the euro's depreciation. Furthermore, political uncertainties in Europe and the negative impacts of trade tariffs are adding pressure on the common currency.

Expectations for the dollar's strength continue. The dollar index (DXY) is poised to remain the dominant currency in 2025, supported by strong U.S. growth, high-interest rates, and safe-haven demand driven by geopolitical uncertainties. Saxo Bank's Chief Investment Strategist Charu Chanana stated, "The dollar will continue to be the leading currency this year due to its high yield and safe-haven properties." However, some analysts are more cautious about the sustainability of the dollar's strength. Société Générale's Chief Currency Strategist Kit Juckes indicated that unless U.S. growth data shows a slowdown exceeding expectations, the likelihood of dollar weakening is low. Juckes added, "It seems more sensible to hold on to my views about a dollar downturn and wait for market conditions to change."

Global impacts and geopolitical risks, including conflicts in the Middle East, the Russia-Ukraine war, and vulnerability in the European economy, continue to enhance demand for the dollar. Additionally, the new trade tariffs imposed by the U.S. are putting further pressure on European economies while strengthening the dollar's dominance in global markets. Throughout 2025, the dollar's performance will remain a crucial focal point shaped by the policies of the Trump administration, the Fed's interest rate decisions, and global geopolitical developments.