The market’s attention at the start of the year is squarely on the incoming administration of Donald Trump.

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His policies are expected not only to drive growth but also to intensify inflationary pressures, supporting U.S. Treasury yields and fueling demand for the dollar.

On Thursday, the first trading day of 2025, the dollar wavered slightly. After a strong performance in 2024, the U.S. currency is expected to remain robust this year.

Interest Rate Differentials Drive Dollar Strength

The wide interest rate gap between the United States and other economies dominated currency markets in 2024, causing most currencies to weaken significantly against the dollar. The Japanese yen, in particular, saw a sharp decline of over 10%, marking its fourth consecutive year of losses. On Thursday, however, the yen showed some strength as the dollar dipped 0.25% to 156.6 yen. This follows a late-December peak of over 158 yen, a five-month high.

Euro and British Pound Under Pressure

The euro briefly gained earlier in the week but flattened at $1.0351, down from September highs of $1.12. Markets expect the European Central Bank to cut rates further in 2025, with forecasts of 113 basis points in easing compared to 42 basis points anticipated from the U.S. Federal Reserve.

EUR/USD

The British pound slipped 0.2% to $1.250, following a 1.7% decline in 2024. Despite this, it remained the best-performing G10 currency against the dollar, bolstered by better-than-expected economic resilience in the UK and persistent services inflation that prompted a more aggressive stance from the Bank of England compared to other central banks.

Chinese Yuan Hits New Lows

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The Chinese yuan languished at 14-month lows as concerns about China’s economic health, potential tariffs from the Trump administration, and declining local yields weighed on investor sentiment. After losing 2.8% against the dollar in 2024—its third consecutive year of decline—the yuan rebounded slightly to 7.31 per dollar in onshore markets. This move is seen as an effort by Chinese authorities to stabilize the currency ahead of Trump’s return to the White House.

Geopolitical Factors Drive Dollar Demand

The dollar’s surge in 2024 was driven by various geopolitical factors, including conflicts in the Middle East and the ongoing war between Russia and Ukraine. These issues continue to support demand for the greenback as global uncertainty remains high.

Ignacio Teson

Economist and Financial Analyst

Ignacio Teson is an Economist and Financial Analyst. He has more than 7 years of experience in emerging markets. He worked as an analyst and market operator at brokerage firms in Argentina and Spain.

The “Super Dollar” Starts the Year Cautiously

The dollar’s surge in 2024 was driven by various geopolitical factors, including conflicts in the Middle East and Ukraine.

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