Similar to US Treasury yields, we expect the USD Index to rise in the short term, driven by the dominance of Trump Trade in the market. This upward trend is likely to persist through the first quarter of 2025. In the medium term, however, the focus will shift to the Fed’s interest rate cut cycle, leading to a gradual decline in the USD Index. However, could the dollar remain stronger than expected in 2025?
To evaluate whether the USD Index could stay elevated throughout the year, we examine the historical patterns of dollar appreciation. Since the collapse of the Bretton Woods system and the creation of the USD Index, the dollar has experienced five major appreciation cycles—two long and three short (Figure 5.1).
By analysing these cycles, we identify five key conditions for the US dollar to sustain a medium- to long-term upward trend: 1) Rising inflation levels; 2) A Fed interest rate hike cycle; 3) Divergence in the US and European monetary policies; 4) Exceptional strength in the US economy; 5) A global economic crisis.
At present, none of these conditions are being met. Inflation remains under control, the Fed is in a rate-cutting phase and US monetary policy aligns with other major economies. Additionally, while the US economy shows resilience, it is not experiencing exceptional outperformance. The global economic environment also lacks the kind of crisis that typically drives a prolonged dollar rally.
Given these factors, the likelihood of the USD Index maintaining a sustained upward trend throughout 2025 is low.
Figure 5.1: US dollar upward cycles
Source: Refinitiv, Tradingkey.com
