Wall Street analysts are growing cautious about the dollar’s (DX=F) outlook for 2025, as President-elect Donald Trump’s policies and the Federal Reserve’s expected interest rate cuts could pressure the greenback in the latter half of the year.
Major financial institutions, including Morgan Stanley, JPMorgan Chase, and Societe Generale, forecast that the dollar will peak as early as mid-2025. Societe Generale predicts the ICE US Dollar Index will decline by 6% by the year’s end.
The dollar has enjoyed significant gains in 2024, on track for its strongest rally since 2015. The surge has been driven by Trump’s election victory and robust U.S. economic data, which has tempered expectations for the number of Fed rate cuts next year. The Bloomberg Dollar Spot Index has risen 6.3% year-to-date, bolstered by speculation that Trump’s proposed tariffs and tax cuts will accelerate inflation, complicating the Fed’s plans to lower rates.
Peak and Pullback
Morgan Stanley’s strategists, including Matthew Hornbach and James Lord, anticipate further short-term gains fueled by trade tensions. However, they project that falling real rates in the U.S. and improved global risk appetite will lead to a dollar decline by late 2025.
Trump’s aggressive trade rhetoric has already impacted other currencies, with the Mexican peso and Canadian dollar weakening following his pledge of 25% tariffs over border issues. Emerging-market currencies have also taken a hit, with MSCI’s emerging-market currency index at a four-month low. Speculative traders remain bullish on the dollar, holding $24 billion in long positions — near their highest levels since May, according to Bloomberg data.
Looming Risks for the Dollar
Historically, the dollar’s rally after Trump’s first election in 2016 was followed by its largest annual drop in 2017 as U.S. economic growth slowed and Europe gained momentum. Analysts warn that a similar scenario could unfold in 2025.
Morgan Stanley predicts U.S. yields will fall faster than those in other regions, narrowing the yield differential that has been a key driver of dollar strength. Tariffs, if enacted, could further strain the dollar by increasing the cost of imported goods.
“Higher tariffs on materials like steel and aluminum could result in negative supply shocks for industries reliant on these imports, such as the automotive sector,” noted Barry Eichengreen, an economist at the University of California, Berkeley to Bloomberg.
Broader Implications
Additional risks to the dollar’s trajectory include a widening U.S. budget deficit and increased bond term premiums, signaling higher perceived risks in holding long-term government debt. Options markets are also trimming bullish bets, with one-year risk reversals on the Bloomberg dollar index trading at just 1% in favor of calls, down from a four-month high last month.
While the greenback’s recent surge reflects optimism about U.S. economic policies, the sustainability of these gains will hinge on Trump’s ability to navigate trade tensions and the Fed’s approach to monetary easing. Analysts caution that the dollar could face significant headwinds in late 2025, driven by both domestic and global economic shifts.
