(Bloomberg) — The dollar is on track for its best year in nearly a decade as U.S. economic strength curbs expectations for the Federal Reserve’s rate-cutting cycle and President-elect Donald Trump’s threats of tough rates supporting bullish bets on the currency.
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The Bloomberg Dollar Spot Index is up more than 7% so far this year, its best performance since 2015. All currencies in the developed world weakened against the dollar as other central banks needed to support local economies.
“The main support for the US dollar this year has been the strength of the economy,” said Skylar Montgomery Koning, currency strategist at Barclays. “That force means the Fed is coalescing on a shallow rate cut, keeping U.S. yields higher than elsewhere, helping to maintain historically high dollar valuations.”
The dollar gauge hit its strongest level in more than two years earlier this month as the Fed cut rates but signaled a slowdown in the pace of monetary easing. But with Wall Street betting the dollar has more room to rise in 2025, global economic growth could improve later this year, which would support other currencies and weigh on the dollar.
In 2024, the yen, Norwegian krone and New Zealand dollar have been the worst performers in the Group of 10 so far, each falling more than 10% against the dollar on December 27. The euro has lost about 5.5% on trading. $1.04, with a growing number of strategists seeing a risk that the common currency will become equal to the dollar next year.
The Bloomberg Dollar Spot Index rose slightly on Friday to cap a fourth week of gains, rising alongside longer-term Treasury yields as traders gauge the Fed’s monetary path and the incoming administration’s policies -Evaluate Trump.
Non-commercial, speculative traders have steadily increased bullish dollar bets in the run-up to and since the US election. They now hold about $28.2 billion in contracts linked to a future rise in the dollar, the highest level since May.
“Current dollar strength is consistent with incoming data. We do not think markets have fully digested our rate expectations, and risks to our forecasts remain positive over the medium term,” Goldman Sachs analysts led by Kamakshya Trivedi wrote in a Dec. 20 note. “Especially if stronger sentiment translates into more sustainable US growth, despite more protectionist measures.”
(Refreshes levels, Bloomberg dollar index.)