Why is the US dollar so strong? Exploring impacts, drivers, and future challenges
Explore how the US dollar's strength affects foreign exchange markets and American consumers, driven by economic policies, and consider what lies ahead as geopolitical factors and potential tariffs shape its trajectory.
Key points
- NZD drops to 0.58574 against USD, lowest since August
- Strong USD driven by robust data and policy expectations
- Global preference for USD adds pressure on the Kiwi
- Traders should monitor NZ economic policies and trade dynamics
A strong dollar and its impact
In the weeks leading up to the US Presidential election, the value of the US dollar rose as polls showed an increased odds of Donald Trump returning to the office. When the results were official, the US dollar index skyrocketed the most it had in years, hitting 2024 highs on November 13th. Overall, the broad-based US dollar index is up around 3% total since Election Day, a staggering move for such a short period of time. Furthermore, most currencies have lost significant value against the dollar in recent weeks. As of today, the US Dollar Index (DXY) is floating around 106.5, still near its highest levels in two years.
A stronger US dollar benefits America and its consumers by making foreign goods and international travel more affordable. This also means imported goods and services are less costly in the US market. However, the downside is that US exports become pricier for foreign buyers, potentially reducing demand for American-made products and widening the trade deficit, which can impact economic growth metrics. Furthermore, because many essential commodities, such as oil, are priced in dollars, a stronger dollar can significantly influence global markets.
Drivers of US dollar strength
The dollar index stayed hovered around 106.6, close to its two-year high, influenced by reduced expectations for Federal Reserve rate cuts and optimism for US economic growth under Trump's presidency. Fed Chair Jerome Powell recently indicated there are no immediate plans to lower interest rates, highlighting the economy's overall resilience, strong labor market, and persisting inflation pressures. Optimistic retail sales and inflation data have led to a more hawkish perspective on Fed policy. While a quarter-point rate cut in December remains anticipated, projected rate reductions through the end of 2025 have decreased to 77 basis points, down from over 100 basis points. Meanwhile, investors are watching closely as Trump considers candidates for Treasury Secretary, with Cantor Fitzgerald CEO Howard Lutnick and investor Scott Bessent reportedly leading the shortlist.
Current USD price action
Since the beginning of the year, the Japanese yen has depreciated by over 9% against the US dollar, reflecting significant shifts in currency dynamics. This decline is influenced by a combination of factors, including Japan's central bank economic policies and global market trends that favor a strong US dollar, such as interest rate differentials and investor sentiment seeking the relative safety of the dollar. The USD/JPY pair has hit 155.538 this morning, maintaining the pair’s overall upward trend from the last month.
Similarly, the Mexican peso has dropped more than 17% against the dollar, a substantial decrease driven by economic uncertainties and potential trade policy impacts that affect Mexico’s economy and its trading relationship with the United States. Consequently, USD/MXN has seen a sharp increase from dollar domination, hitting 20.81266, an over two-year high.
Meanwhile, among other major currencies, the New Zealand dollar has also shown considerable weakness, falling to levels not seen since August, reaching a low of 0.58574 against the USD. This performance is attributed to various factors, such as New Zealand's economic conditions, fluctuating commodity prices affecting its export-reliant economy, and the global preference for the greenback amid economic volatility.
What’s next for US dollar? The Trump trade explained.
Trump has made his preference for a weaker dollar very clear. However, his plan to impose import tariffs and tax cuts are forecasted by economists to do the complete opposite for the greenback and have strong effects on the global economy. Much of the dollar’s future rides on whether Trump’s campaign pledges become reality. Proponents of Trump’s policy to add tariffs to imported goods believe this will promote domestic alternatives. However, many US industries product (for example, the automotive industry) rely heavily on foreign imports, so even US companies may face major economic decline from supply chain costs increasing. However, with this consequent reduced demand for foreign imports, the US dollar value would likely increase overall.
J.P. Morgan and Barclays analysts predict a whopping 7% gain in the dollar’s value in the next few months due to weakening foreign currencies against the US dollar (specifically the Chinese yuan and the euro), specifically if Trump were to follow through on his tariff policies. However, many analysts also disagree, saying there is high potential for retaliation from other countries if these tariffs were to be implemented, and the possibility for increased geopolitical turmoil to follow, despite the dollar’s spot as a safe haven and the world’s reserve currency. Fed Chair Jerome Powell declined to comment on the potential impact of the Trump administration on the U.S. economy, saying we do not have enough details to make a proper analysis ahead of December’s monetary policy decision.
How to Trade US Dollar
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions on USD pairs
Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.
Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing. Past performance is not indicative of future results.