As 2024 comes to a close, the USD has experienced fluctuations throughout the year, but overall it shows an upward trend, particularly strong in the fourth quarter. Recently, after the Federal Reserve sent a hawkish signal during the December interest rate decision, it also surpassed a two-year high. The USD plays a crucial role in the global economy; not only is it a barometer of the USA, the largest economy in the world, but its fluctuations also cause significant ripples in the global economy and financial markets. This year, significant events such as changes in the Federal Reserve's interest rate policy and Trump's return to the White House, coupled with geopolitical instability, have notably impacted the exchange rate trends of the USD, leading to a chain reaction in the global market.

Looking ahead, will the USD be able to maintain its strong performance at the end of the year as it enters a more resilient and enduring period next year? In the face of potential further shocks and turmoil, can the USD sustain its robust performance amidst volatility?

A review of the performance of the USD and major market currencies in 2024.

1. USD: Rising amidst fluctuations.

In 2024, the overall trend for the USD shows an upward movement. From January 2 to December 30, 2024, the USD Index rose from 102.25 to 108.03, reflecting a 6.55% increase so far. Major global currencies against the USD have shown a pattern of depreciation; most major non-USD currencies have depreciated, while the HKD appreciated against the USD. The Brazilian Real and Argentine Peso have depreciated significantly, with the USD rising by 27.75% and 27.43% against them, respectively. Following closely are the New Zealand Dollar, Japanese Yen, Canadian Dollar, and Australian Dollar, all declining by more than 8% against the USD. The British Pound, Singapore Dollar, and Renminbi have seen relatively smaller declines against the USD.

From January to April: In the first half of this year, the USD appreciated overall, rebounding from its low in 2023, but the extent was relatively moderate. Due to strong economic performance in the USA, high inflation, and various global geopolitical conflicts, the USD index overall fluctuated upward. The robust U.S. employment and inflation data released at this time delayed market expectations for the Fed to initiate interest rate cuts and lowered expectations for the future extent of rate cuts, contributing to a trend of 'higher for longer' interest rates, which also boosted U.S. Treasury yields.

Meanwhile, the eurozone's battle against inflation has progressed more smoothly than in the USA; the interest rate differential has led to the USD appreciating against other major currencies. Rob Haworth, Senior Investment Strategy Director at U.S. Bank Asset Management, stated: 'The fundamental factor affecting currency trends is the central bank's interest rate policy. Earlier this year, the European Central Bank began to cut rates, while the Fed delayed its rate cuts.' As the market expects the Fed to begin rate cuts, the USD weakened against the euro.

Additionally, the outbreak of global geopolitical conflicts, such as the Israeli-Palestinian conflict and the Red Sea crisis, has intensified the flow of funds into safe-haven assets such as the USD, further strengthening its exchange rate.

From April to July: Entering the second quarter, the USD experienced high-level fluctuations, with several uncertainties persisting. At this time, inflation in the USA remained high, and the economy grew moderately. Continuous geopolitical turbulence led to a rise in risk aversion among international investors, who flocked to traditional safe-haven assets such as Gold and the USD. During this period, some economic data showed weakness, raising doubts about whether the U.S. economy could maintain its strong performance. The Fed's expectations for monetary policy did not change much, resulting in an upward trend for the USD, but the extent was relatively low, maintaining a narrow fluctuation.

From July to October: As the second half of the year began, the USD overall declined from July to October, and the USD index fell consecutively over the three months leading up to September. In a September that should have been strong, it performed relatively poorly but later saw a significant reversal. During this phase, the market continued to have strong expectations for rate cuts, and the rapid decline of the USD during this period was mainly attributed to the restart of rate cut trades and the resulting unwinding of carry trades.

The USD hit its lowest point of the year at the end of August to early September. On September 18, the Fed's interest rate decision surprised the market by cutting rates by 50 basis points. Prior to this, the market had almost assumed that the Fed would cut rates by at least 25 basis points at the September meeting, with only some speculating a 50 basis point cut, but the betting on a 50 basis point cut gradually gained momentum later.

From October to December: Starting in September, the USD began to rebound from its low, showing strong performance seasonally since the end of September, while U.S. stocks and the USD diverged. Subsequently, the USD continued this upward momentum into the year-end. From October to December, based on the cooling expectations for significant Fed rate cuts and multiple factors such as the 'Trump trade', the USD generally rose.

This round of USD appreciation benefited from multiple factors, with the rise in U.S. Treasury yield being particularly crucial. Additionally, interest rate cuts by major global central banks such as the European Central Bank, Swiss National Bank, and Bank of Canada further expanded the USD's interest rate advantage, attracting significant capital inflow into USD assets.

It is worth mentioning that according to past performance, the USD often becomes a victim of the year-end "Santa Claus rally" and portfolio rebalancing flows, as traders typically sell off USD at this time to enter high-risk assets such as stocks. The Bloomberg USD Index has seen declines in December during 8 out of the past 10 years, but the strong position of the dollar at the end of this year has surpassed past seasonal weaknesses.

During this period, the USD Index briefly broke through 108 at the end of November, reaching a more than two-year high. On December 19, the Federal Reserve announced a 25 basis point rate cut in its interest rate decision, and due to "forward guidance" hitting rate cut expectations, the USD soared again, reaching its highest point since 2022.

2. Japanese Yen: Fluctuating "Roller Coaster".

Differing from market expectations at the end of 2023, the Japanese Yen is once again experiencing a "roller coaster" market in 2024. After a continuous decline in the first half of the year, it welcomed a turning point in July, followed by a rapid rise to a high point for the year, but subsequently fell again.

The Japanese Yen continued to depreciate in the first half of the year, with the exchange rate falling from 140 points in January to 161 points in July. During this time, the Yen fluctuated briefly with changes in expectations for interest rate hikes by the Bank of Japan and rate cuts by the Federal Reserve. The Yen had been on a continuous decline for more than three years, primarily due to the external appreciation of the USD and the Bank of Japan maintaining an accommodative policy. In March of this year, the Bank of Japan canceled negative interest rates, but dovish comments did not meet market expectations, and the Yen did not gain support.

As the Bank of Japan announced a 15 basis point rate hike in July 2024, exceeding market expectations, the Yen reached a bottom and initiated an upward turning point. At the same time, the Japanese government announced a reduction in its bond purchase program. This policy shift is also seen as a key turning point in monetary policy philosophy, releasing confidence and determination for "monetary normalization," subsequently pushing the Yen higher. During this period, the USD Index also declined.

After the exchange rate of the Yen appreciated to 139 in September, it again depreciated back into the 150 range. During the same period, the USD Index strengthened, leading to a further decline in the Yen exchange rate.

Looking ahead, although the Bank of Japan has a cautious attitude at the December policy meeting, some market participants still expect that the Bank of Japan may implement interest rate hikes in January 2025. In addition, some Analysts believe that as the Federal Reserve continues to cut interest rates, the interest rate differential between Japan and the USA will narrow, leading to a trend of yen appreciation in the first half of 2025.

3. Euro: High volatility, fluctuating downward at the end of the year.

The euro's trend in 2024 maintains a range of fluctuations, showing a downward trend at the end of the year, which once fell to a low after Trump's election, and then continued to 'tumble'.

In the first half of the year, the euro declined somewhat, which may partly stem from the differentiation logic of monetary policy, as the European Central Bank began cutting interest rates earlier than the Federal Reserve and to a greater extent. Since mid-April, the relative strength of the American economy has gradually weakened, while unexpected strength in economic data from the eurozone has also led to a rebound in the euro.

At the end of the year, the euro continued to decline due to market concerns that uncertainties in trade policies may weigh on the eurozone economy, bringing downward risks to the European Central Bank's interest rate outlook. Forex strategists note that the short-term interest rate differential between the eurozone and the USA remains significant. At the same time, Trump's tariff policies are expected to harm growth in the eurozone, and the European Central Bank will need to support the eurozone economy through further interest rate cuts. In addition, Germany's fiscal situation seems to be mired in difficulties and is unlikely to improve dramatically, adding further pressure to the euro.

In the future, the eurozone's economic recovery still faces uncertainties. In December, the European Central Bank released its latest macroeconomic forecast, further lowering its growth expectations for the eurozone economy. European Central Bank President Lagarde expressed concern over the continued weakness in the eurozone's economic development. Although a severe recession is not expected in the eurozone in the future, the market anticipates that it will continue to grow at a low rate, and an increasing number of economists are warning that the risk of stagflation is real, posing significant challenges to the economic situation.

Therefore, analysts indicate that the euro against the USD may face downward pressure as the European Central Bank is expected to cut interest rates to stimulate the European economy, contrasting sharply with the Federal Reserve's more cautious approach, which could lead to a weakening of the euro.

Looking ahead to 2025, the trend of the Euro may be more dominated by the expectations of the Federal Reserve's policies and interest rate fluctuations, and the tariff policy of the Trump administration may also become an additional pressure. However, due to the significant uncertainty in the inflation trend, whether the European Central Bank can cut interest rates significantly as the market currently expects remains uncertain.

4. Some Emerging Markets currencies:

Indian Rupee: Plummeting, continuously hitting new lows.

The performance of the Indian Rupee this year is striking, showing an overall depreciation trend, and continuously setting new lows by the end of the year. On December 23, it further refreshed its historical low to 85.82.

This huge decline is mainly due to the weak recovery of the domestic economy in India, rising inflation, global economic slowdown, and increased uncertainty which has weakened investors' confidence in Emerging Markets. In addition, the depreciation of the Rupee is also influenced by the appreciation of the USD.

Trump's tariff policy also has a significant impact on the current decline of the Indian Rupee and its future trend. If Trump imposes comprehensive tariffs on trade partners, then theoretically, the currency exchange rates of countries that export significantly to the USA or have a large trade surplus will be more sensitive.

According to institutional statistics, the top 10 sources of imports for the USA are Mexico, China, Canada, Germany, Japan, South Korea, Vietnam, India, Ireland, and Italy. Among them, Mexico, Canada, Ireland, Vietnam, Japan, South Korea, and India (over 15%) have high trade dependency on the USA. Therefore, the volatility of currencies in countries like India may significantly increase and be subject to additional negative impacts.

Mexican Peso: The 'difficult brother' that continues to decline.

Similar to the Indian Rupee, the Mexican Peso has also shown a devaluation trend this year, reaching a new low by the end of the year. On November 26, it broke the historical low to 20.83.

The main factors behind the continuous decline are economic issues within Mexico; in recent years, Mexico's economic growth has been sluggish, and inflationary pressures have risen. On the other hand, political factors also play a role, as events on the Mexican political stage, such as presidential elections and policy reforms, may lead to market fluctuations.

It is worth mentioning that, like the Indian Rupee, the Mexican economy is highly dependent on exports, and trade relations with countries like the USA will be key in influencing the Peso's trend. As a major trading partner of the USA, with a high trade dependency, Trump's tariff policies have significantly pressured the Mexican Peso.

Looking ahead, trade relations and foreign capital inflow will have a significant impact. The enforcement of Trump's tariffs, the pace of domestic economic recovery, and various other factors will affect the future trend of the Mexican Peso. Given that Trump will begin his term next year, trade protectionism is expected to bring certain adverse factors for the Mexican Peso, but considering several factors, the specific impact remains somewhat uncertain.

Impact of USD movements: the chain reaction of the global economy and financial markets.

Impact on US-listed companies:

The fluctuations in the USD affect not only the Forex market itself but also many aspects of the market. Many US-listed companies are facing an unexpected issue this year: the appreciation of the USD, and this challenge may worsen with the continued strength of the USD in the future.

Although the appreciation of the USD reflects the relative strength of the USA economy, it poses some problems for certain listed companies. For companies with multinational business operations, the foreign exchange gains and losses caused by currency fluctuations will affect the profit settlements of listed companies. A stronger USD means that US multinationals will face higher costs when converting overseas profits back into USD, leading to a reduction in company profits.

According to estimates from the Global Research Division of Bank of America, for every 10% year-on-year increase in the USD, the earnings of companies in the S&P 500 Index will decrease by approximately 3%. Companies looking to hedge against a stronger USD must also invest resources to implement hedging strategies to offset the impact of USD appreciation on their profits.

There are many listed companies in the US stock market, especially in the Technology Industry, that derive a high percentage of their business and revenue from overseas. A strong USD may have negative financial impacts on these companies. Data from FactSet shows that the international revenue exposure of the US Information Technology, Materials, and Communications Services Industries is the highest, with overseas income accounting for 57%, 52%, and 48% of total revenue, respectively.

Andrew Gage, senior vice president of financial and financial solutions company Kyriba, stated that the strong USD "has caused a lot of panic," and "Chief Financial Officers are asking their financial teams to manage the risks brought by the strong USD more cautiously." During this year's earnings reports season, companies such as Apple (AAPL.US), IBM (IBM.US), and Procter & Gamble (PG.US) also mentioned that Forex is an adverse factor.

The fluctuation of the USD will also affect the competitiveness of US companies' exports. A strong USD makes US export goods more expensive in international markets, which may reduce the scale of exports and impact US multinationals that rely on international markets. American-listed companies that focus on exports will find their competitiveness in overseas markets weakened, and their revenue and profits will also suffer.

In addition, the trend of the USD may also impact US stocks; a rising USD could attract international capital to the USA in search of higher returns on USD assets, thereby increasing demand for US stocks. However, at the same time, due to a potential time lag in the liquidity of the USD impacting the stock market, a decrease in USD liquidity may exert pressure on US stocks after a certain period.

Impact on the Global Economy and Financial Markets:

The strength or weakness of the USD also has a significant impact on the global economy and financial markets, affecting a wide range of asset classes from foreign stocks to commodities, and directly influencing the stability of global financial markets.

The USD's position will influence the global economic landscape. In countries like Europe where the economy is sluggish, and with strong growth expectations in the USA, it is anticipated that the 'strong dollar' scenario will strengthen again. The dominant position of the USD in the global financial sector provides the USA with various economic advantages, including lower borrowing costs and the ability to manage trade deficits more easily. This widespread use ensures sustained demand for the USD and reinforces its position during global economic fluctuations.

However, the movement of the USD will also drive international investors to reposition themselves; when the USD weakens, international investors often seek other investment opportunities. Although the USD still dominates, traditional safe-haven assets such as Gold have also gained favor in the current market, with significant increases in gold prices reflecting the growing demand for Precious Metals as safe-haven assets (despite Gold's share of total reserves still being at a historical low). Many central banks have diversified their reserves, holding Gold as a hedge against currency risk, USD depreciation, and inflation.

At the same time, Emerging Markets will also be affected by USD fluctuations. Many emerging economies rely heavily on imports; the appreciation of the USD will increase borrowing and export costs, negatively impacting foreign trade development, weakening international market competitiveness, and slowing economic growth. Especially for countries with USD-denominated debt, those with substantial USD debt will face higher repayment costs, which may lead to fiscal strain and hinder economic development. Additionally, uncertainty in Exchange Rates may also increase the risk of foreign capital outflow.

For example, Brazil and Turkey, key exporters of Commodities such as Soybean and Iron Ore, face a decline in competitiveness due to commodities becoming more expensive, and Turkey, which holds a large amount of USD-denominated debt, is also struggling due to rising loan repayment costs.

Looking Ahead to 2025: Is a Strong Dollar Expected?

Looking ahead to 2025, multiple factors remain complex. Several Institutions predict that the USD will be generally strong next year, with significant fluctuations in market trends throughout the year, influenced by changes in Federal Reserve policy expectations, the implementation of tax policies by elected President Trump, economic conditions, and geopolitical situations, all of which are major factors to watch.

Goldman Sachs, in its annual foreign exchange market outlook, claims that the USD will enter a "Stronger for Longer" era. The bank stated that with changes in the global economy and policy environment, a "strong dollar" will become the prevailing theme in the Forex market by 2025, and this trend is expected to persist for a long time. JPMorgan predicted in its December client report that, based on the amplification of the American exceptionality, sustained high interest rates, productivity improvements, and an expanding innovation gap, the USD will reach a new high by 2025.

The fluctuations of the USD this year may be dramatic, and Institutions have differing views on the trends. Some Institutions believe that the USD index may exhibit a "rise first, then fall" trend, peaking in mid-year before heading downhill.

There are also Institutions that believe the USD may follow a trend of falling first and then rising, with initial lows followed by highs. Given that major economic indicators like employment and inflation in the USA may continue to support the Federal Reserve in cutting interest rates early next year, a new round of interest rate cuts at the beginning of 2025 may drive the USD further down from current levels. However, as monetary easing gradually supports employment and inflation, the USD may rebound toward the end of next year.

Changes in Federal Reserve policy expectations.

Considering various factors, changes in Federal Reserve policy expectations may be a significant factor. The Federal Reserve cut rates by 25 basis points at the end of the year, thereafter pushing the USD up significantly due to hawkish rhetoric. The latest dot plot shows a reduction in the number of expected interest rate cuts to 2 times in 2025, a sharp decline from earlier expectations of at least 6 cuts before November. This latest expectation also supports the bullish trend of the USD index at the end of the year and may extend the rise into early next year.

On the same day as the Federal Reserve's third interest rate cut this year, it released its quarterly economic forecast, significantly raising its inflation expectations for the coming year. At the same time, the Federal Reserve also raised its forecast for economic growth in 2025 by 0.1 percentage points to 2.1%. Richmond Fed President Barkin previously stated in an interview that he expects inflation to continue to cool down by 2025, suggesting that the Federal Reserve may decide to slow its pace of rate cuts.

Several major Wall Street firms have begun to reduce their bets on the Federal Reserve's interest rate cut outlook. Barclays' Chief Economist Marc Giannoni leads a team that has raised its inflation forecasts for the USA next year while lowering GDP expectations. They predict that the number of interest rate cuts by the Federal Reserve in 2025 will be reduced from the previous forecast of 3 cuts to 2 cuts, each by 25 basis points.

Goldman Sachs economists believe that the Federal Reserve "may want to take more cautious actions to ensure they find the correct terminal point on the path to rate cuts." They predict that a 25 basis point cut will occur at every meeting leading up to March 2025, followed by the final cuts in June and September 2025. JPMorgan predicts that due to the "policy uncertainty of the Trump administration," the Federal Reserve will shift to cutting rates quarterly starting in March 2025 instead of at every meeting, until the federal funds rate reaches 3.5%.

It is worth mentioning that the latest interest rate path 'dot plot' shows considerable disagreement within the Federal Reserve regarding next year's interest rate trends. Among the 19 policymakers, 5 predict that the rate cut by 2025 will reach 75 basis points or more. Future interest rate trends remain uncertain, but institutions indicate that the Federal Reserve may still cut rates, although the extent of the cuts may not be enough to alter the recent strength of the USD.

Impact of Trump's 2.0 Policy

Trump's return to the White House will bring significant shocks to the global financial markets, and the global Forex landscape in 2025 will also be affected by related policies. Many policies in Trump's campaign platform point towards aggressive fiscal spending, which could further lead to more government debt issuance. Increased tariffs and other revenue-raising policies may temporarily push up inflation and disturb the Federal Reserve's rate cut cycle. Some institutions believe these factors could lead to a higher U.S. Treasury yield center, raising the USD center.

According to estimates from the U.S. think tank CRFB, Trump plans to expand and modify the Tax Cuts and Jobs Act, intending to make it permanent, which is expected to add about 5.35 trillion USD to the deficit over the next 10 years.

The implementation intensity of Trump's 2.0 tariff policy may directly impact Forex. Measures like trade protectionism and increased tariffs will affect the international trade landscape, potentially indirectly influencing the supply and demand relationship of the USD. For U.S. trading partners, tariff policies may lead to substantial pressure on their currencies.

RBC Capital Markets stated that the next three months will reveal how far Trump is willing to go on tariff issues. During Trump's 1.0 era, some targeted tariff measures were introduced but were not widely applied. Some individuals believe this time things will be different upon return, but the message from the 2024 global elections is that people indeed dislike inflation, and the institution is skeptical about whether Trump is ready to implement policies that depress U.S. real income.

Meanwhile, some Analysts caution that Trump may initiate a currency devaluation race, seeking an active depreciation of the USD to boost manufacturing. A report by research company BCA Research published on December 11 states that to boost domestic manufacturing, Trump may actively seek USD depreciation to reduce the cost of foreign purchases of American goods, increase demand for American products, and thereby promote production and employment of domestic enterprises. Additionally, compared to potentially wide-reaching trade barriers, using USD depreciation to stimulate manufacturing may incur lesser losses.

The U.S. economy is strong, and the foundation of the USD is solid.

It is worth mentioning that the resilience of the USA's economy continues to provide solid support for the USD, with the core factors supporting the USD strength remaining solid. The macroeconomic outlook for the USA is expected to remain positive next year, and the market's expectation of a "soft landing" is heating up. Compared to other countries, the economic position of the USA remains unshakable, still dominating the global economy.

At the same time, the high-return asset market in the USA will also drive the tilt of capital flows, further benefiting the USD. Goldman Sachs stated in its exchange rate outlook that "the USD has been overvalued for much of the past decade, thanks to its excellent risk-adjusted ROI, attracting portfolio flows from other developed economies."

Geopolitical conflicts will also bring risk factors, and the instability of international political situations in the future may further stimulate investors' demand for safe-haven assets, thus promoting preference for the USD. Additionally, other factors such as recovery in countries that cut interest rates earlier, valuations, repatriation potential, and convergence of interest rates will also bring some disturbances to the trend of the USD.

Although there are many factors bullish on the future trend of the USD, potential risks still exist, such as the Federal Reserve cutting rates more than expected, the USA economy underperforming expectations, or global economic growth exceeding expectations and rebalancing global capital flows. The implementation intensity of Trump's policies, changes in market sentiment, and geopolitical situations in the Middle East and Russia-Ukraine may also disrupt the pricing of commodities and risk assets.

However, as Goldman Sachs pointed out in a report, since the USD reached a peak at the end of 2022, the market's expectations for the depreciation of the USD have mostly not materialized. Although the USD experienced limited adjustments in 2023 and 2024, this retreat is more a result of short-term factors. Looking ahead, it remains to be seen whether the USD can enter a stronger new era and whether it can continue to rise amidst fluctuations.