Dollar bulls, encouraged by Donald Trump’s victory, are entering a month that has historically punished the U.S. currency relative to other currencies.
Since the election on November 5th, the US currency has risen by around 2%, but seasonal effects show that the odds are against it from now on. The dollar has recorded losses in eight of the last ten Decembers, often a victim of year-end portfolio rebalancing flows and the so-called “Santa Claus rush”, which encourages investors to sell dollars in exchange for riskier assets such as stocks .
The chances of sudden and disproportionate swings are greater this time, with the risk that US President-elect Donald Trump’s social media posts will roil markets, unnerving investors in a month that also has nine key monetary policy meetings around the corner. around the globe and a flood of relevant economic data. Any hint of a negative surprise could trigger a stampede to another ultimate safe-haven currency, making the “sell the dollar” narrative obsolete.
“You better hold on to your seats,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “Normally, it’s about pushing the pedal to increase risk and sell dollars, but with Trump coming to power, who knows?”
Currency volatility has soared since the election, as investors from New York to Tokyo plan what the next four years hold for the $7.5 trillion-a-day currency market. At the center of the debate is the fate of the dollar under a Trump presidency – which is expected to fuel inflation in the world’s largest economy, complicating the Federal Reserve’s prospect of a rate cut.
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Recent market actions highlight the difficulty of trading the dollar: Bloomberg’s dollar indicator fell for three consecutive months through September before reversing course. JPMorgan Chase, Goldman Sachs and Citigroup expect the U.S. currency to continue strengthening as tariffs are seen as adding to price pressures and hurting other economies.
Trump’s impact on currencies goes beyond the inflation channel – he demanded commitments from the so-called Brics nations not to create a new currency as an alternative to using the dollar.
A Bloomberg gauge of the dollar rose as much as 0.8% on Monday in New York trading, the biggest intraday gain in more than three weeks, as political turmoil in France sent the euro and most currency’s countries in the Group-of-10 fell against the dollar.
“The bottom line is that until something changes, the path of least resistance for the dollar is higher,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “The key to the dollar in 2025 will be tariff policy.”
Consolidation phase
Other analysts disagree with the strong dollar view. Morgan Stanley sees dollar strength peaking towards the end of the year and easing into 2025 as investors shift from focusing on trade risks to the likely path of continued easing from the Fed. Ugo Lancioni shares a similar feeling.
“We have a small positive position on the dollar, but we are reducing it as the dollar appreciates,” said the senior portfolio manager at Neuberger Berman in Milan. “The dollar could enter a consolidation phase, the market is , in fact, quite bought.”
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The latest data from the Commodity Futures Trading Commission (CFTC) lends credence to this view. Asset managers have been the most bullish on the U.S. currency since 2016, highlighting the dollar’s potential decline as investors take profits on positions that benefit from a stronger dollar.
“It’s going to take a little bit of time for a lot of Trump’s trade policies to come to fruition,” said Leah Traub, portfolio manager and head of the currency team at Lord Abbett. “The one thing we are cautious about is the fact that the market recognizes many of these points.”
The end result will likely be ever-wider swings in the dollar as investors analyze every headline and economic data point. A gauge of the Bloomberg Dollar Spot Index’s implied volatility for the next half-year is trading around its strongest mark in 18 months. The Fed’s policy meeting in mid-December will encourage investors to recalibrate their bets on the U.S. currency, while others, such as policy outcomes from the Bank of Japan and the Bank of England, will also have an influence.
Abdelak Adjriou is among those bracing for further swings — especially if the Fed catches investors off guard by keeping rates on hold this month. The finance manager at Carmignac in Paris expects the Fed to make cuts, but with US employment and inflation data before then, the scenario could change. Still, he is choosing to analyze any short-term fluctuations.
“I’m looking at the medium term and the dollar is still king,” he said.
