The US dollar has climbed to multi-month highs again even as the Fed is on an easing path, benefiting from a variety of supporting factors that continue to propel its strength.

Key drivers for USD strength

Trump 2.0 tariffs policy: The administration’s renewed focus on tariffs could weigh heavily on currencies of trade-exposed economies, particularly those in Asia and the Eurozone. The appointment of China hawks to the cabinet is spelling a clear near-term focus on trade and tariff policy, which is USD-positive. The Chinese yuan (CNH), euro (EUR), Mexican peso (MXN), and Australian dollar (AUD) are among the most vulnerable to this trade pressure, as these regions face heightened risks from tariff wars.

Trump 2.0 fiscal policy: The fiscal push, including tax cuts and deregulation, is likely to support US growth, which could drive yields higher. Rising yields, particularly in the US, increase the relative appeal of the USD against lower-yielding currencies, further boosting demand for the dollar.

Fed easing from strength: While the Fed is cutting rates, it is doing so from a position of economic strength, with the US economy continuing to show resilience. This strength provides a solid foundation for the dollar, as markets see the Fed’s actions as a proactive measure rather than a response to economic weakness.

US exceptionalism: The continued political and economic challenges facing other major global players, particularly Europe and Japan, further bolster the USD. In Europe, political instability—especially in Germany where a ‘snap’ election will now be held next February – is adding to the economic malaise. Meanwhile, Japan’s delay in raising rates leaves the yen in a precarious position.

Geopolitical risks: Geopolitical tensions, particularly in the Middle East, have the potential to flare up at any moment, further supporting the dollar’s safe-haven status. In times of heightened global uncertainty, investors typically flock to the USD, increasing its demand.

Room for USD to run

Given these factors, the USD still has room to run. With the ongoing pressures on trade-exposed currencies, the US dollar is likely to remain a dominant force in global markets.

Most exposed

EUR: Political instability in Europe, combined with an already fragile economic recovery and the looming threat of tariffs, leaves the euro vulnerable.

CNH (Chinese yuan) and China-proxies like AUD: As the US-China trade war intensifies, the yuan faces increasing pressure, especially with China’s policy stance favoring further stimulus.

JPY: Carry trades could gain interest once again with Fed’s easing stance likely to be more cautious and BOJ’s hesitant on rate hikes under the new government. .

Commodities: Commodities are facing a double whammy—downward pressure on demand due to escalating trade frictions and a stronger US dollar. As tariffs hit global supply chains and trade volumes, the demand outlook for key commodities, such as industrial metals and oil, weakens. Additionally, a higher USD often makes commodities more expensive for holders of other currencies, further dampening global demand.

Least exposed

GBP: Sterling is less exposed to tariff-risks and an inflationary budget could slow down the pace of BoE rate cuts.

EURUSD

Read the original analysis: USD: How high can it go?

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