A currency trader walks by the screens showing the Korea Composite Stock Price Index (KOSPI), left, and the foreign exchange rate between U.S. dollar and South Korean won at a foreign exchange dealing room in Seoul, South Korea, Friday, Nov. 22, 2024. (AP Photo/Lee Jin-man)
New York: The US dollar is set to start 2025 on solid footing before facing risks such as faster inflation and a surging fiscal deficit over the coming year, according to the latest Bloomberg Markets Live Pulse survey.
Heading into next year, 89 survey takers were split over the various risks that could hurt the US dollar the most.
Deficit worries garnered the largest share of the responses at 38%.
Another 32% see weaker United States and global growth weighing on the greenback next year should President-elect Donald Trump, who will take office in January, enact the tariffs he pledged on the campaign trail.
The Bloomberg US Dollar Spot Index is fresh off its longest run of weekly gains in a year and trading at its highest point since 2022 as traders pile into bullish bets on the view that Trump’s policies will support the currency.
Yet survey respondents have noted that while those policies may create conditions where the greenback advances in the short term, their longer-term hit to the economy would ultimately curb the currency’s appeal.
That was the case in Trump’s first term.
The US dollar surged nearly 5% between his 2016 election victory and his inauguration the following January as Treasury yields spiked higher.
Yet it went on to fall sharply in 2017 as the US economy lost momentum while growth picked up in Europe.
Still, proponents of greenback strength in the near-term outnumbered bears by some two and a half times.
Some 70% of those surveyed see the Bloomberg’s US dollar gauge trading higher one month from now.
Two key themes underpin belief in the greenback heading into the end of the year.
Respondents and investors expect Treasury yields to be anchored by the US Federal Reserve’s (Fed) patience on cutting interest rates – and that will bolster investor flows into US assets.
They also cited the possibility that a raft of uncertainty surrounding Trump’s future economic policies will lead to a haven bid for the US dollar.
“We like the US dollar here, but the core point of how far the move can go is still intact,” said Peter Vassallo, a portfolio manager at BNP Asset Management who added to long US dollar cash and options positions after the US election against the euro, Australian dollar and yen.
The eurozone currency fell last Friday to its weakest level in two years, dragged by expectations that the European Central Bank will aggressively ease monetary policy to bolster growth in the region.
That contrasts sharply with the United States, where the outlook for future Fed rate cuts has softened in the face of resilient economic data.
The professional and retail investors responding to the survey are confident enough to forgo history as a guide.
In data going back to 2005, Bloomberg’s US dollar benchmark has on average fallen 0.5% in December, a seasonally weak month for the US currency.
Respondents said the Mexican peso will bear the brunt of future US dollar strength, followed by the yen and Brazilian real.
Speculative currency traders have extended long US dollar positions since the US election and now hold some US$23.3bil in bullish derivatives wagers, Commodity Futures Trading Commission data as of Nov 19 show.
That’s the most since June.
The majority of investors responding to the survey – some 55% – expect the US dollar’s value will peak before US equities do.
More than half of respondents, meanwhile, said they plan to hold their exposure to the S&P 500 Index steady over the next month.
Complicating the environment for the greenback is the fact that many of the risk factors anticipated in the months ahead – like high tariffs that hit growth and inflationary policies that drive up yields – are also seen as potential catalysts for strength.
Decoding how currency markets respond to the final form of specific Trump policies will take time, according to Lauren van Biljon, head of rates and foreign exchange for the global fixed-income team at Allspring.
That could mean a heightened level of currency volatility as traders bet that a second Trump presidency will supercharge swings in foreign exchange, given all the questions surrounding his economic policy agenda.
“I certainly don’t think we’re there yet in terms of US dollar strength being overdone,” said van Biljon.
“That being said, into next year I think there’ll be chances on both sides of that trade. The market is really good at parsing the short-term risks, but longer term it’s really unclear.” — Bloomberg
