As the U.S. economy shows resilience and expectations for interest rate cuts wane, Wall Street is forecasting further gains for the dollar. Major financial institutions, including Goldman Sachs, TD Securities, and Deutsche Bank, expect the greenback to strengthen this year, driven by strong economic fundamentals and incoming President Donald Trump’s pledge to implement harsh tariffs.
The Bloomberg Dollar Spot Index climbed for a fifth consecutive session on Monday, reflecting a growing bullish sentiment. Speculative traders, such as hedge funds and asset managers, have ramped up their bets on the dollar, reaching the highest level of optimism since 2019. According to data from the Commodity Futures Trading Commission, these traders now hold aggregate bullish positions worth approximately $33.7 billion, as of the week ending January 7.
“We believe the dollar will stay on top,” said Helen Given, a foreign-exchange trader at Monex. She added that any potential surge in the dollar index could occur either just before or shortly after Trump’s inauguration.
At present, the dollar index is only 2.8% away from testing its peak levels from 2022. The cost of hedging against further dollar appreciation has surged, reaching its highest level in nearly two years.
The current dollar rally is fueled by several factors, including Trump’s tariff plans and the Federal Reserve signaling a more cautious approach to interest rate cuts. A strong jobs report last Friday prompted major Wall Street banks, including JPMorgan Chase, to revise their rate-cut predictions for the year.
Despite the dollar’s historically expensive valuations, traders are increasingly confident in its continued ascent. Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, and strategists at TD Securities both predict the dollar will test its 2022 highs once again.
Goldman Sachs, led by Kamakshya Trivedi, has raised its dollar forecast for the second time in two months, now predicting a 5% rally over the next year. Meanwhile, Deutsche Bank, under George Saravelos’ leadership, expects the euro to fall below parity with the dollar, projecting a range between 0.95 and 1.05. This outlook is largely driven by a widening gap in policy expectations between the U.S. Federal Reserve and the European Central Bank.
The euro recently hit a two-year low below the 1.02 mark, while the British pound, weighed down by fiscal concerns in the UK, traded at its weakest level since November 2023. Australia’s dollar also reached its lowest point since the early stages of the pandemic.
Deutsche Bank also recommends buying the dollar against the yen, with the pair expected to rise to 160 from its current level of around 157, even in anticipation of rate hikes by the Bank of Japan. However, it remains unclear whether these hikes will bolster the yen.
According to Upadhyaya of Amundi, the Fed’s likely response to tariff-related uncertainty—pausing interest rate hikes—could create widening interest rate differentials, which would further favor the dollar.
Trump has reiterated his commitment to his tariff plans, and reports suggest that he is considering declaring a national economic emergency to justify universal tariffs. These developments are set to continue influencing market dynamics as traders await more concrete details.
Meanwhile, U.S. government debt continues to attract international investors, drawn by higher returns. The benchmark 10-year Treasury yield has risen by more than a full percentage point since September, nearing the critical 5% threshold.
Kathy Lien, managing director at BK Asset Management, emphasized that significant changes in the macroeconomic landscape would be required to alter her long-term bullish stance on the dollar.
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