The Dollar's Remarkable Surge: Will It Peak in 2025?

When examining the contradictions in Trump's policies this year, the dollar's performance is undoubtedly eye-catching. Despite Trump expressing a preference for a “weak dollar” during his campaign, market reactions show that the dollar has risen significantly since last December. The continuous rise of the dollar has raised concerns in the market about whether Trump is worried about it.

Looking back at the market performance from 2016 to 2017, the dollar's trend closely aligned with Trump's previous term, peaking in early January 2017. Currently, the market widely expects that the dollar may have already peaked, but whether it will repeat the historical pattern of a peak followed by a decline remains to be seen based on market reactions and specific timing.

The current appreciation of the dollar seems to be supported by favorable timing and conditions. On one hand, with Trump about to take office, the uncertainty of policies provides a rich space for market imagination; on the other hand, instability in the European economy and political turmoil provide a relative advantage for the dollar. Although market sentiment towards the dollar is not extreme, a turning point for the dollar may still take some time to appear.

We believe that the future trajectory of the dollar index will be influenced by several key macro indicators. First, the positioning under the macro narrative indicates that the systematic rise of the dollar reflects changes in the global landscape, which is unlikely to reverse in the short term. The structural transformations in China and the EU, along with the resilience of the US economy, mean that there are currently no conditions for the dollar index to drop below 100.

Looking ahead to 2025, the dollar index may not have the conditions to break the 2022 high unless Trump aggressively imposes global tariffs and the Federal Reserve reconsiders interest rate hikes, but currently, the likelihood of these two scenarios seems low.

Second, the implementation of Trump’s new policies may not favor a too-strong dollar. Although Trump’s fiscal policy tends to be proactive, various constraints may lead to a relatively tight fiscal policy in the initial stages.

The core contradiction in Trump’s policy lies in the different positive feedback mechanisms that may lead to policy failure and market turbulence. For instance, while a strong dollar helps resolve the sustainability issues of US debt, the pursuit of trade balance under a strong dollar could lead to higher tariffs, inflation expectations, and rising long-term interest rates, further destabilizing the US debt market.

To address core issues, the Trump administration may need to control inflation and stabilize the US debt market. Fiscal policy may need to shift towards a more stable yet slightly tighter stance, while monetary policy should remain loose. Additionally, negotiating tariffs to encourage non-US economies to purchase more US debt and to prevent non-US currencies from depreciating relative to the dollar may be strategic choices for the Trump administration.

Third, the dollar's movement depends not only on its own factors but also on other currencies, especially those of Europe and China. The economic dynamics of Europe and China may lead to unfavorable changes for the dollar between the end of the first quarter and the second quarter, which may include improvements in European political stability and efforts in China to prevent economic inertia from declining.

In summary, we hold a cautious bullish stance on the dollar, expecting it to experience a pullback after a peak, with the turning point likely occurring in the first quarter. While the dollar's peak may be above 110, it is unlikely to reach the high of 2022. The second half of the year may see a more complex dollar trend that requires further observation.

For the Chinese CNY, the trend in the first half of this year may differ from previous years. This week, the CNY broke through the 7.30 constraint against the dollar, and the traditional Spring Festival settlement surge has not occurred. Typically, the CNY tends to appreciate in the first quarter and faces pressure in the second quarter. However, this year’s situation may be the opposite; after overcoming early-year pressures, the subsequent trend may differ.

Risk Warning: Unexpected changes in the policies of the new US presidential term may lead to a significant cooling of the global economy, resulting in an unexpected appreciation of the dollar index; unexpected geopolitical fluctuations and liquidity issues may cause the dollar to surge beyond expectations.