The DBS Equilibrium Exchange Rates (or DEER) indicate fair values for global currencies relative to a trade-weighted currency basket.

The United States Dollar (USD) saw sharp gains in the aftermath of Trump's election victory and a Republican sweep of Congress. It is now highly over-valued according to our DEER model, with valuations close to the extreme seen in October 2022. Since the elections, Trump has threatened to impose tariffs on Canada, Mexico, and China. This underscores risks that he will follow through with his campaign promises to enact tariff hikes in his first year. Though the passthrough of tariffs to consumer prices depend on many factors, it will be inflationary to some extent. A rebound in inflation could see the Fed partially paring back its previous guidance of rate cuts in 2025, keeping the USD supported.

The Swiss Franc (CHF) is the second most over-valued currency in DM markets, with USD/CHF staying almost unchanged at 0.88 compared to its pre-US election level. Meanwhile, Swiss inflation remains near a three-year low at 0.7% y/y for November, undershooting consensus expectations. A scheduled 10% cut in electricity prices from January next year will further depress inflation. Growth is also cloudy for the export sector. SNB Chair Schlegel recently underscored concerns that weakness in German industry is sapping demand in the Swiss manufacturing sector, and record CHF strength against EUR is certainly not helping. The SNB is expected to cut rates further, which should weigh on the CHF.