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Dollar Strength Under Trump: Impact on Global Currencies in 2025

As Donald Trump's inauguration as president approaches, market participants continue to increase their bets on a stronger dollar. Expectations surrounding Trump's anticipated policies and their potential effects on both the U.S. and global economies justify predictions for a stronger dollar in many respects. A stronger dollar, however, implies losses for other currencies. While the year begins with many uncertainties, professional forecasts for the upcoming year are as follows:


EUR/USD Forecast: Parity and Beyond in 2025


The Eurozone is highly vulnerable to potential trade wars under Trump's administration. Higher tariffs pose a significant risk to the region's export-oriented economies. In a Eurozone already experiencing contracting economic activity, the European Central Bank (ECB) may be forced to adopt more aggressive easing measures to support the economy.


Swap markets are pricing in a 115 basis-point rate cut by the ECB over the course of the year, which is significantly more than the two quarter-point cuts expected for the Federal Reserve. This divergence fuels expectations for further depreciation of the euro against the dollar.


Most economists predict that the EUR/USD pair will reach parity in 2025, with some even forecasting a drop below parity. J.P. Morgan Research expects the pair to dip to 0.99 in the first quarter, breaking parity, followed by a recovery in subsequent quarters. Their forecasts for the second and third quarters are 1.03 and 1.05, respectively, with the year-end estimate at 1.08.

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The anticipated recovery in the second quarter is primarily driven by factors such as a potential slowdown in U.S. growth, a resolution to the Russia-Ukraine conflict, and a rise in U.S. inflation, which could reduce the dollar's real yield advantage. Should these scenarios unfold, the dollar's strength may wane.


Additionally, the Eurozone faces significant challenges, including the euro's depreciation, rising tariffs, and the looming energy crisis. These factors could intensify inflationary pressures, prompting the ECB to act more cautiously.


Some institutions factor in these risks and project higher parity levels compared to others. According to ING strategists, parity is expected to hover around 1.04 in the first three quarters of the year, with a drop to 1.02 forecasted for the fourth quarter.


GBP/USD Outlook: Pressure Mounts Amid Strong Dollar


The British pound was the best-performing currency in 2024, losing only about 1% against the US dollar. However, it is expected to face further losses against the strong dollar in the coming period.


Throughout 2024, the Bank of England (BoE) reduced interest rates at a slower pace than the Federal Reserve, and expectations for this trend to continue in 2025 have helped limit the pound's losses against the dollar. Nonetheless, Donald Trump's election victory, the UK's weak economic performance, and budget concerns under the newly elected Labour government appear to have shifted the outlook for the pound.


While the UK is not a direct target of Trump's tariff policies, the global rise in tariffs is expected to weigh on economic activity in an already contracting economy. Although BoE officials have signaled gradual and rare rate cuts for 2025, expectations of slower growth and a weaker labor market are fueling bets on more aggressive rate reductions.


Swap traders are pricing in a 62-basis-point cut, with a 70% probability of the first cut occurring in February.


As a result, the pound is anticipated to face additional pressure against the US dollar, with a potential recovery projected from the second quarter onwards. J.P. Morgan Research forecasts the GBP/USD pair to decline to 1.21 in the first quarter, followed by gradual increases to 1.27, 1.28, and 1.32 in the subsequent quarters. Goldman Sachs, meanwhile, has a 12-month forecast for the pair to rise to 1.30.

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In contrast, some banks foresee a more bearish outlook for the pound. HSBC expects the dollar to maintain its strength, predicting the GBP/USD pair to remain at 1.23 by the end of 2025.


Trump's Tariff Threats: What They Mean for China's Economy


Asian economies will face dual challenges this year: Trump's high tariffs and the Federal Reserve's tight monetary policy, with China at the center of attention. Trump has threatened to impose a 60% tariff on Chinese goods, a concerning development for an economy already grappling with significant headwinds.


In 2024, despite deflationary pressures and a real estate crisis, China's economy grew robustly. However, the series of stimulus measures announced by Beijing since September have fallen short of fully restoring consumer confidence. This year, with higher tariffs looming, China's exports are at risk, and the economy will need a revival in domestic demand to sustain growth.


The government, however, appears better prepared for potential tariff hikes compared to Trump's previous term and seems more willing to take concrete measures.


These measures are expected to include monetary easing, with the People's Bank of China (PBoC) likely to cut interest rates and reduce the reserve requirement ratio for banks. Moreover, to effectively ease monetary policy and support exporters, the PBoC may need to tolerate a weaker yuan.


According to ING strategists, the yuan is expected to trade in the 6.90--7.35 range against the dollar this year. The bank also sees potential for further depreciation in 2026, depending on economic and political developments.


2025 USD/JPY Forecast: Resilience or Continued Weakness?


Diverging economic performance between the US and Japan continues to drive volatility for the Japanese yen. In 2024, contrasting monetary policy stances from the two central banks and carry trade activity were the main reasons for yen weakness, pushing it to a 38-year low against the US dollar, despite currency interventions. While Trump's potential trade policies add uncertainty, the yen may show more resilience this year.


The Bank of Japan (BoJ) ended its negative interest rate policy in 2024, raising borrowing costs to 0.25%. Inflation has remained persistently above 2%. Despite negative real rates, structural issues such as weak productivity growth have prevented the BoJ from adopting an overly hawkish stance, undermining the yen's strength.


Additionally, ongoing political turmoil in Japan has further contributed to its weakness.

BoJ officials have indicated they will continue raising rates this year if economic data align with their forecasts. Traders anticipate two quarter-point hikes in 2025. While the Fed remains cautious and on the path of easing, the BoJ's hawkish approach could limit yen depreciation, as it reduces carry trade gains. However, this may not be sufficient to trigger significant yen appreciation.


On the other hand, if yen depreciation accelerates, authorities may intervene in the forex markets. Such interventions could curb bearish sentiment against the yen and potentially support its value, depending on the scale of the action.


J.P. Morgan Research forecasts the USD/JPY pair to reach 152 in the first quarter of 2025 and ease to 148 by the fourth quarter. Citi, however, offers a more optimistic outlook, predicting a decline to 140 in Q1 and into the 130s by year-end.


In contrast, ING strategists take a more bearish view, projecting the yen to weaken further, with a 12-month target of 160 against the dollar. They attribute this potential weakness to ongoing political instability and the BoJ's inability to adopt a sufficiently hawkish stance.


China's Slowdown and Tariff Risks: Implications for the Aussie Dollar


The Australian dollar lost over 9% against the US dollar in 2024, marking its steepest decline in six years. However, further downside may be on the horizon. The Australian economy is likely to be impacted by potential trade wars between the US and China, putting additional pressure on the Australian dollar.


China is Australia's largest trading partner, and any slowdown in the Chinese economy could weigh heavily on Australia's growth. Economists are considering the possibility of insufficient measures from China to counter high tariffs, as well as the likelihood of a weaker Chinese yuan.


In such a scenario, the Reserve Bank of Australia (RBA) may be forced to implement further rate cuts to support the economy, which, according to Macquarie Bank strategists, could push the Australian dollar toward 60 cents against the US dollar.


On the other hand, the RBA kept rates at a 13-year high in 2024 due to persistent inflation. If price pressures continue this year, the central bank may adopt a more cautious approach. Some banks are factoring in this possibility and offering more moderate forecasts for the Australian dollar.

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J.P. Morgan Research predicts the AUD/USD pair to hover around 0.62 in the first quarter, with a gradual recovery to 0.67 by year-end. Meanwhile, ING expects the currency to fluctuate within a 0.63-0.65 range throughout the year.

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