We expect the USD to maintain its relative strength in the first half of 2025. At its FOMC meeting on Wednesday, the Fed projected two instead of four rate cuts in 2025 while acknowledging inflation risks from Trump’s fiscal and trade policies. The US has the best-performing economy in the Developed Markets amid weak governments and lacklustre economies in countries such as Germany, France, Canada, and Japan. Unlike his first term, Trump is set to impose tariffs at the outset, and not the second year, of his second term.
In the short term, we cannot rule out USD bulls taking profit on the DXY’s stellar 7.6% gain driven by the Trump Trade this quarter. US lawmakers are struggling to get bipartisan support for a funding bill to avert a government shutdown today. They need to address the debt limit, which was suspended in June 2023 to January 1, 2025. The USD’s support from US bond yields could diminish if bond vigilantes take over and drive them higher on fiscal sustainability worries. In September, Moody’s warned that the fiscal outlook would deteriorate in the next presidential administration.
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