For Traders from Club iNSIDER: Trump 2.0 and the Dollar Rise: Reality or Overestimation

Optimistic dollar and defensive outlooks highlight G-10 FX as 2025 approaches.

Optimistic dollar and defensive outlooks are key themes for G-10 currencies heading into early 2025. But a dose of caution is needed on the former, as it could be over-hyped, with excess optimism soon to be calculated, and with seasonal pressure on the dollar in December. As for defensive currencies, it’s not too late to join the yen bull camp, while our positive view on the British pound for 2024 calls for caution now.

1. Optimistic Dollar: Phase Two May Be Over

The optimistic dollar theme, active since early October, continues, as outlined in our G-10 FX Outlook 2025 of November 27. However, it is well-understood and perhaps already partially priced in. This assessment is more qualitative than quantitative. The “Trump 2.0 dollar optimists” view – based on a positive tariff and fiscal channel – is based on working assumptions and changing expectations.

The next phase will focus on assessing the extent to which these assumptions will hold true. This will depend on the specific tariffs and fiscal measures announced in early 2025, as well as the reactions of other countries and the performance of the US economy.

The uncertainty surrounding these factors explains why we are cautious about how optimistic we can be about the dollar at this time. This may necessitate some consolidation or correction in December.

2. Note the seasonal decline in the dollar in December

There is an element of uncertainty and caution when interpreting seasonality in the currency markets, but when looking at BBDXY there is clear seasonal pressure on the dollar in December. The dollar index has declined in December in eight of the last ten years, although the dollar rose in December 2016, when Trump was first elected.

We also note that on six occasions the BBDXY has recovered in January. In 2023/24 the index fell 2.1% in December but rose 2.08% in January. The Bloomberg DXY ten-year average net return is -0.75% for November and -0.01% for December.

3. Safeguards: Yen vs. Franc

Beyond the short-term bullish bias for the dollar, we favor defensive positions in G-10 currencies in early 2025, reflecting economic and political uncertainty that could return and change the currency outlook. The yen and Swiss franc are attractive for diversification strategies, but for now the yen may have an advantage over the franc for two main reasons.

First, the franc is often traded as a “safe” substitute for the euro, and the ongoing problems in the eurozone make shorting the euro-franc attractive. In contrast, the yen is less exposed to the euro’s problems, which supports short positions in the franc-yen.

Second, the respective policy biases of the BOJ (tightening, likely supporting the yen) and the SNB (loosening, likely unfavorable to the franc) also reinforce the decline in the franc-yen. Bears on the franc-yen may have a better path in 2025, with nearby support seen around this year’s low of 165.

4. It’s not too late to go short the euro-yen

A bearish view on the euro-yen is one of our strongest beliefs for the G-10 currencies in early 2025, as we noted in our reports of November 14 and 18, and it has been confirmed with a 3% decline since its initial note. It’s not too late to join in.

The domestic situation, with political turmoil in France and economic stagnation in the eurozone, contrasts with the calmer economic and political context in Japan. This dynamic, along with the prospect of tightening by the BOJ and easing by the ECB, makes the bearish scenario even more compelling early next year.

The euro-yen may have fallen a little over 3% since early November, but it is still up about 2.85% from its January low and 40% above its 2020 low. Nearby support is seen around 152.16 and 145, which represent corrections of 38.2% and 50% of 2020-2024 growth. from 114.54 to over 160.

5. Monitoring Pound Data – Key to Returning Optimism.

The bullish view on the pound was one of our strongest convictions during the year and it was successfully realized by the end of October. However, the international context has become more negative for the pound, as Donald Trump’s re-election has strengthened bullish positions for the dollar, while questions over the UK budget and softening UK economic data have taken some of the shine off the pound.

The international situation could still develop in different directions, as we noted in our 2025 FX Outlook, but a return to a more optimistic outlook for the pound will require an improvement in UK indicators soon.

The decline in the pound against the dollar to around $1.27 from near $1.34 is mainly due to the strength of the dollar, but also to the decline in the Citi Economic Surprise Index from +8 in October to -47 now.