The USD Forecast
The soaring US dollar has been on quite a bull run in 2024. That’s up until recently when concerns over trade tariffs have made investors and currency traders a little wary of holding USD.
But as you’ll read here, even if the US economy falls ill and the stock market coughs, the rest of world will suffer a cold. The US and its national currency shines above all assets including oil, gold, stocks, and precious metals. Cash is king, and cash is liquid.
Yes, US stocks are precious too with the forecasts for 5% growth in 2025, however investors such as Warren Buffet are all in on US dollars. He knows something and is sensing the greenback isn’t going to lose its value or luster.
At such lofty heights, is the US dollar the right currency to use to hedge, or count on for significant value, or is it nearing its apex before a fall in 2025? Last year, economists and Forex experts both predicted the US dollar would fall. It did briefly, but during 2024, it rose strongly (+5.8%) as you can see in the chart below from TradingView.
The USD remains the currency of international trade and is the most valued and reserved currency in the world. The DXY (U.S. dollar index) has risen 17.2% against developed economies since the pandemic.
According to CEIC, United States Foreign Portfolio Investment increased by an all-time high of $637,592,000,000 USD in Sep 2024, vs an increase of 136.161 USD bn in the previous quarter. The most recent data is likely similar, adding to the massive inflows before July 2024.
Foreign direct investment in the US has shown not signs of abating, and likely will rise considerably as President Trump’s economic policies take effect.
Strong Economy, Political Stability, and Improving Balance of Trade
And now as the US economy revs up and international investors pour money into US stocks, the DXY is poised to push above 110. As foreign nations head into periods of major political change and upheaval, the US will be seen as a safe haven for the wealthy who will want to reduce risk in other countries and park their fortunes in US banks and stocks. With such weak outlooks for Europe and Asian economies, investors will obsess over US innovation, opportunity and profitability. This all factors into the US stock market forecast for next few years.
While some economists suggest the US economy will falter, they balk at suggesting the rest of the world is also headed for much quicker declines. The fact is, the US has been supporting the global economy for decades and the plug has been pulled on that support. Without US trade, Europe and China could be headed for strong recessions. China is on the verge of collapse and even Russia is rumored to be headed for political change.
These chaotic conditions cause money to leave (selling their currencies) to buy the only safe currency – the US dollar. And consider that the J.P. Morgan Emerging Market Currency Index fell by 9% in 2024, down 5% since September in this latest rush of USD strength. The new darling growth emerging market is the United States of America. The precarious nature of global currencies might even impact Bitcoin and other cryptocurrencies, as these rise during optimistic exuberance in markets. Could they be in for a crash?
6 Month Performance Chart for Major Currencies
Clearly, USD is outperforming even with the decline in the last few days. President Trump is easing back on the heavy use of tariffs, but the threat has been good medicine for US trade as other nations are reviewing the political orientation and attitude toward trading with the US.
President Trump has threatened action on Mexico (China good rerouting into US) and likely will follow through as the trade deficit rises. The Peso might be one currency to avoid.
According to FXStreet, January and February are typically strong months for the dollar and they’re calling for the dollar index to hit 110 in January. They believe that dips in the DXY are a buying opportunity that traders will jump on. They also believe current stagflation will take the dollar higher for longer.
Is the USD Really Worth It?
Not all believe the US dollar is worth it. RBC posts that they believe the greenback is 20% overvalued and the weaker US economic data will spoil the party. Corporate earnings were strong in 2024, and given the political changes about to unfold, the handcuffs are being taken off US companies – freeing them to pursue and realize maximum profitability.
Of course, the USD is highly sensitive to both interest rates and GDP. There is an optimism via the election of pro-US business President Trump in that manufacturing is expected to grow in the US and tariffs will help reduce imports, thus decreasing the volume of US dollars being sold.
Demand for important US products such as Tesla vehicles, oil and gas, AI chips, and growth in US tourism should bolster the greenback’s value.
The biggest threats to the dollar are swelling US national debt and fiscal deficits (Yahoo Finance). A high dollar puts a strain on US exports however, so it’s strength ultimately will cause an economic slowdown. Experts believe the FED will keep rates higher for longer due to US economic growth and GDP performance, and higher than all other nations who will lower their bank rates to deal with plummeting economic performance.
This could result in rising inflation and is a real threat to the USD and the 2025/2026 economy.
And some experts feel the US economy will slip into recession, but Trump’s economic plan with higher energy production, lower taxes, low regulation, and eventually, lower interest rates have to rev up jobs, income and consumer spending.
A thriving, healthy, unrestrained US economy will be the darling of global investors making everything in America, good as gold. Higher energy production will lower oil prices thus giving the US economy an even bigger boost and raise the profits of oil companies. See some oil stocks you might want to consider.
Let’s review the top 6 factors that influence the USD price:
Influential Factors on USD Valuation:
- Interest Rates: Higher U.S. interest rates tend to attract foreign investment, increasing demand for the USD and leading to its appreciation. Conversely, lower rates can diminish its appeal.
- Economic Performance: Strong economic indicators, such as GDP growth and low unemployment rates, bolster confidence in the USD. The U.S. economy’s outperformance has been a significant factor in the dollar’s recent strength.
- Inflation Rates: Lower inflation enhances purchasing power, making the USD more attractive yet rising inflation can erode this advantage.
- Trade Policies: Protectionist measures, such as tariffs, can impact the USD by affecting trade balances and economic relationships. President Trump’s proposed tariffs could influence the dollar’s value by altering trade dynamics.
- Political Stability: Political events and policies can lead to market uncertainty, influencing investor behavior and currency valuation. The recent U.S. presidential election has introduced uncertainties that may affect the dollar’s strength. However, we may be entering a period of strong political stability given the Republicans have a commanding control of the Presidency, House and US senate.
- Global Economic Conditions: Economic developments in other countries, especially major trading partners, can affect the USD’s relative value given recessions around the world could impact US supply chains and trade policies.
Experts may not agree on the trajectory of the US economy, stock market and US dollar, yet we’ve seen solid macroeconomic drivers that support a strong dollar. And if Warren Buffet has increased his cash exposure, it paints a compelling picture for a positive US dollar forecast.
See more about the Trump policy economic benefits, US stock market predictions, and what’s happening ont the stock market today.
