The price has been appreciating almost relentlessly since the end of September. In just three and a half months, the (DXY), which measures the value of the dollar relative to a basket of six major foreign currencies, including , , , , and , rose more than 10% (from the September 27 low) . until the maximum of January 13). It surpassed the critical level of 110.00 on January 13, and although it has since fallen slightly, it is still by far the best performing coin among other major currencies so far this year.
“The reasons for such an impressive rally are plentiful and diverse, but generally it comes down to growing interest rate differentials between the United States and other major economies,” says Kar Yong Ang, financial markets analyst at Octa Broker.
In fact, the (Fed), the central bank of the United States, currently maintains its reference interest rate in the range of 4.25-4.50%, which is the second highest level among eight industrialized economies. Most importantly, however, unlike most other central banks, the Federal Reserve is not expected to cut rates aggressively in 2025 as the U.S. economy continues to demonstrate surprising resilience, marked by data strong labor market and strong consumer spending. Additionally, geopolitical uncertainty and the risk of trade wars have boosted demand for the US dollar as a safe haven. In fact, the election of Donald Trump as the next president of the United States largely served as a catalyst for the recent rally in the US dollar.
“It was always assumed that Donald Trump's victory in the presidential race would be bullish for the US dollar, as his trade and immigration policies were considered inflationary. Therefore, the market began pricing in that outcome well in advance and the dollar began his rise a month before the elections,” says Kar Yong Ang, financial markets analyst at Octa Broker.
Specifically, Trump has explicitly threatened to impose trade tariffs on the eurozone and Canada, which clearly had a bearish impact on their currencies. For example, the euro, which has a dominant weighting of 58% on the DXY, has lost more than 8% against the US dollar since September 25, 2024. However, the biggest losers have been risk-sensitive currencies such as the (AUD). and the (NZD), which devalued more than 10%.
Performance of major currencies since October 2024
Simply put, the US dollar is rising on fears that Trump's policies could spur inflation at best and trigger an all-out trade war at worst. Additionally, the US economy is outperforming most of its peers, so the Federal Reserve will most likely ease its monetary policy at a much slower pace compared to other countries. In fact, a recent Bloomberg survey forecasts modest 1% growth for the euro zone this year, slightly better than the 0.8% projected for 2024, but well below the long-term average of 1.4%. Not surprisingly, the market continues to expect three or four 25 basis point rate cuts from the European Central Bank (ECB) in 2025, compared to just one or two from the Federal Reserve over the same period. Under these circumstances, it is difficult to expect EUR/USD to recover substantially from its recent lows.
“I think there is more than a 50% chance that EURUSD will fall towards parity at some point this year and may even temporarily fall below the 1.0000 mark,” comments Kar Yong Ang, adding that the eurozone faces a series of structural challenges ranging from high energy costs and deindustrialization to geopolitical tensions and fiscal instability.
As for the DXY, its rally has started to show some signs of exhaustion lately. Technically, there is a bearish divergence between the DXY price and the Relative Strength Index (RSI). Furthermore, fundamentally, many bullish factors have already been priced in and the bulls lack fresh impetus for the next bullish move.
“I think the market has overpriced all the positives related to the dollar and the dollar actually seems slightly overvalued right now. I think betting on its continued appreciation is risky,” says Kar Yong Ang.
In fact, in a sense, the market has factored in a less likely scenario: that is, Donald Trump imposing blanket tariffs and destabilizing global trade. While such a scenario is certainly possible, its probability is relatively low. For example, Bloomberg reported that the United States could take a measured approach to tariffs.
“The market is looking ahead. Just as it began pricing in Trump's victory long before the election, it can now begin pricing in underlying bullish expectations and anticipate a slowdown in classic 'buy the rumor, sell the news' fashion.” “, concludes Kar Yong Ang, financial markets analyst at Octa Broker.
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