Dollar bulls emboldened by Donald Trump’s win are entering a month that has historically punished the greenback.
The US currency has advanced about 2% since the Nov. 5 election, but seasonality shows the odds are stacked against it from here. The greenback posted losses in eight of the last 10 Decembers, often a victim of year-end portfolio rebalancing flows and the so-called Santa Rally that emboldens traders to sell dollars for riskier assets like stocks.
The chances of outsized, sudden swings are greater this time around with the risk of US president-elect’s social media posts roiling markets, unnerving traders in a month that also has nine major central bank policy meetings and a deluge of key economic data. Any whiff of a negative surprise could trigger a stampede to the ultimate haven currency, rendering the “sell the dollar” narrative obsolete.
“Better hold on to your seats,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. “It’s usually about pushing the pedal for risk-on and selling dollars, but with Trump coming into power, who knows?”
Currency volatility has soared since the election as investors from New York to Tokyo game-plan what the next four years holds for the $7.5 trillion-a-day foreign exchange market. At the heart of the debate is the dollar’s fate under a Trump presidency — one that’s expected to fuel inflation in the world’s biggest economy, complicating the Federal Reserve’s rate-cut outlook.
Recent market action underscores the difficulty in trading the greenback: Bloomberg’s dollar gauge fell for three straight months through September before reversing course. JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. all expect the US currency to keep strengthening with tariffs 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 to not create a new currency as an alternative to using the dollar.
A Bloomberg gauge of the greenback gained 0.5% on Monday, the biggest daily advance in three weeks, as political turmoil in France weighed on the euro and most Group-of-10 peers.
“The upshot 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 & Co. “The key to the dollar in 2025 is going to be policy on tariffs.”
Consolidation Phase
Others disagree with the strong dollar view.
Morgan Stanley sees the greenback’s strength peaking by year-end and petering out into 2025, as investors shift from focusing on trade risks to the Fed’s likely path of continued easing. Ugo Lancioni shares a similar sentiment.
“We have a small positive position in the dollar but we are reducing as the dollar appreciates,” said the senior portfolio manager at Neuberger Berman in Milan. “The dollar may enter a consolidation phase, the market is actually quite long.”
The latest Commodity Futures Trading Commission data lend credence to the view. Asset managers remain near the most bullish on the US currency since 2016, underscoring potential for the dollar to fall as investors take profit on positions that benefit from a stronger greenback. Speculative traders including asset managers and hedge funds hold some $23.3 billion worth of long wagers on the currency, according to the latest CFTC data for the week ended Nov. 26.
“It’s going to take a little bit of time for a number of Trump’s trade policies to play out,” said Leah Traub, a portfolio manager and head of the currency team at Lord Abbett. “The one thing we’re cautious of is that the market acknowledges a lot of these points.”
The end result is likely ever-bigger swings in the dollar as investors parse every headline and economic data point. A gauge of implied volatility for the Bloomberg Dollar Spot Index over the next half year is trading around its strongest mark in 18 months. The Fed’s mid-December policy meeting will spur investors to recalibrate their US currency bets, while others like the Bank of Japan and Bank of England’s policy outcomes would also hold sway.
Abdelak Adjriou is among those girding for renewed swings — especially if the Fed catches traders off guard by keeping rates on hold at this month. The money manager at Carmignac in Paris expects it will cut, but with US jobs payrolls and inflation data before then, the picture could change. Still, he’s opting to look through any short-term choppiness.
“I’m looking at the more medium-term and the dollar is still the king,” he said.
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