US Fed and Trump Trade Drive Dollar to Best Quarter Since 2016

The U.S. dollar is experiencing significant growth, heading towards its best quarterly performance in eight years. Recent data shows that the currency has surged to a two-year high, primarily driven by a strong U.S. economy and a hawkish stance from the Federal Reserve, which has enhanced its attractiveness.

Since the end of September, the Bloomberg Dollar Spot Index has increased by 6.3%, marking its most robust quarter since the conclusion of 2016, when Donald Trump was elected as President. Although there was a slight decline of 0.4% on Friday, triggered by new data revealing that the Federal Reserve’s preferred measure of inflation came in cooler than anticipated, the dollar remains on track for its best annual showing since 2015.

The ongoing strength of the U.S. dollar is fueled by solid domestic economic growth, a healthy labor market, and persistent inflation that exceeds the Federal Reserve's 2% target. This situation has convinced the Fed to lower expectations for monetary easing in the upcoming year, causing a notable rise in the dollar's value.

Positive Outlook for the Dollar

Analysts from HSBC highlighted that the current economic landscape is “hitting all the right notes” for the dollar. They predict that there are no apparent factors to diminish the dollar's strength in 2025. In addition, Aroop Chatterjee, a strategist at Wells Fargo, anticipates that Trump's policy agenda—especially heavy trade tariffs—will further bolster the dollar's value.

Chatterjee pointed out that the combination of Trump's trade, immigration, and fiscal policies could significantly alter the overall economic condition, favoring the dollar even more. The ongoing robust performance of the U.S. economy stands in stark contrast to the sluggish growth experienced by many developed countries, enhancing the dollar's status in the global market.

International Comparisons and Investor Sentiment

According to Nathan Thooft, a senior portfolio manager at Manulife Investment Management, there is a pressing need to observe positive growth indicators from other parts of the world. Unfortunately, the data in recent times has not been encouraging. For instance, non-commercial investors, including hedge funds and asset managers, have increased their bullish positions on the dollar to the highest level since May, indicating strong market sentiment.

Paula Comings, head of FX sales at U.S. Bancorp, noted a prevailing consensus among clients that the dollar is likely to remain strong in the short term. However, she also pointed out potential challenges in the medium term, such as the trade deficit and an uncertain fiscal outlook.

Dollar, Economy, Inflation