January has delivered the volatility that was widely anticipated but not only from the expected sources. USD fundamentals remain strong relative to other major currencies but equity markets suggest that the support from US exceptionalism could fade, at least temporarily.

The USD rallied further in December and economic fundamentals and policy developments suggest that the USD has further upside. The start of 2025, however, is dominated by uncertainties surrounding first policy moves. Trump could surprise by being more moderate or more radical. Current rhetoric suggests the later but that could change quickly. In our view, uncertainty is unlikely to fade quickly and that implies more volatility for FX markets in coming months.

This year has been again a broad USD range [...]

Donald Trump’s sweeping election victory paves the way for far-reaching policy changes. This could enhance the USD’s exceptionalism or bring it to an end. Much will depend on the persistence of US economic outperformance as well as the market’s confidence in Fed independence and the sustainability of US government debt.

The USD weakened further in September triggered by more Fed rate cut expectations. US soft-landing, Fed easing and China stimulus all point to further USD weakness. However, there are several risks that could lead to a different outcome. As a result, we believe the USD will stay in its current range until the end of the year but not necessarily uniformly against all currencies. In our view, the AUD and the JPY have good chances to outperform.

The USD weakened further in August as renewed hopes for a soft-landing of the US economy and further Fed rate cut expectations revived the risk-on market sentiment. In the near-term, much will depend on US labor market figures. However, we believe that the market’s Fed rate cut expectations are overdone.