Key Predictions from Experts for 2025
- Dollar strength: When the dollar briefly sold off on the Thursday after the US election some were wondering whether the smart money had concluded that Trump would be bad for the dollar. Our advice is not to overthink it and instead take the firm view that the new administration’s plans for looser fiscal and tighter immigration policy, when combined with relatively higher US rates and protectionism, all make a strong case for a dollar rally.
- European currencies will underperform: One of our key macro calls for next year is that the ECB will outpace the Fed in monetary easing as eurozone growth headwinds look set to intensify with Trump’s protectionism while fiscal stimulus keeps the Fed cautious on rate cuts. Accordingly, we expect a further widening of the two-year USD:EUR swap rate gap to the 200bp area, which is consistent with EUR/USD trading below 1.05.
- Emerging forex markets face the toughest environment since 2020: Next year, emerging market currencies will face the twin headwinds of lower global trade volumes and higher US yields. When Trump took office in 2017, world trade was growing 5-6% YoY. By the end of 2019, after two years of tariffs, world trade was falling 2% YoY. In addition to tariffs, rising US bond yields will stress test the fiscal position of emerging markets and pressure those with large external financing needs.
- Asia: China will try to hold the line: Despite robust domestic fundamentals in strong growth and falling inflation, Asia FX will have to navigate the dual challenge of higher US interest rates and likely higher tariffs by the US in 2025, resulting in a stronger USD. At the centre of it all will be China. Tariffs will be negative for the country, but we don’t expect a repeat of the first trade war for four main reasons:-There is no shock factor this time around; markets have been preparing for this possibility for over a year.
- -Global investor positioning is different from 2018. Markets are now heavily underweight China, and there is less money at risk of flight from there.
-The Fed is now in a cutting cycle instead of a hiking cycle.
-The PBOC now has currency stability as a key policy goal and will resist major movements in either direction.
- Latin America: Real rates will be important: Much scrutiny will be on the Mexican peso, where the USMCA is up for review in the summer of 2026. Equally, the Brazilian real had a poor Trump 1.0, and government spending will remain in focus in 2025; Brazil has presidential elections the year later. While both currencies look vulnerable to incoming US trade policy, both do enjoy some protection from 5-6% real interest rates. Brazil also has a sizeable stock of FX reserves which it is ready to use.
- Yen-funded carry trade strategies to fall out of favour: Up until July this year, yen-funded carry trades had been very popular and successful. Since then, a massive unwind of short yen positions, along with uncertainty about the path for US politics and the global economy, have all kept volatility high. Uncertainty over the path for USD/JPY, Japan’s domestic economy, BoJ rates, and the more challenging outlook for the high-yield target currencies (previously the Mexican peso) also make carry trade strategies so much harder to justify. Looking back at the performance of carry trade strategies during peak Trump 1.0 (March 2018-September 2019) and funding positions in the three highest yielding G10 currencies at the time (NZD, CAD and AUD) out of yen, would have delivered an annualised return of -3.3% with an 11% maximum drawdown. Not very attractive.
- Emerging market -Turkish lyra: If there is an ongoing interest in carry, we think that will remain in the Turkish lira. The US election demonstrated the TRY’s resilience to global influences, and in fact, the lira was one of the few EM currencies in the region that managed to rally in the post-election environment. The Central Bank of Turkey is nearing the start of an easing cycle, which reduces potential carry, but should not decrease the CBT’s determination to keep USD/TRY under control.