【MACRO Insight】The key to the US dollar in 2025 is here! Where are the opportunities and challenges?

As President-elect Trump prepares to return to the White House, the dollar has shown unexpected strength. Earlier this week, the dollar's nominal trade-weighted exchange rate index compiled by the Federal Reserve was just below 130, the highest level since March 1973. The ICE Dollar Index recently broke through 110, reaching its highest level since November 2022. The dollar index has risen 9% since Election Day and 7.7% in the quarter ending December, its best quarterly performance since the first quarter of 2015.

The rapid strengthening of the U.S. dollar has had a profound impact on the global economy, especially on the performance of U.S. companies. In a recent research report, a team of analysts at Goldman Sachs pointed out that a stronger dollar will cause the dollar value of overseas revenue to decline, thereby increasing the possibility that currency translation effects may cause companies to miss Wall Street's sales and earnings targets. The three most vulnerable sectors are information technology, materials and energy stocks.

A stronger dollar could put more pressure on earnings at companies with greater exposure to overseas revenue, which could have a bigger impact on their stocks and lead to "more differentiated earnings performance" among S&P 500 companies this earnings season, Morgan Stanley said in a report earlier this week.

A stronger dollar could also create a bigger headwind for overseas economies and financial markets. International stocks, measured in dollars, have significantly underperformed their U.S. counterparts over the past year, especially when their returns are converted to dollars. Other countries could feel a bigger burden as a stronger dollar puts more pressure on their currencies, which could limit the ability of monetary authorities to cut interest rates to boost domestic demand.

The strength of the dollar has historically triggered financial crises. In the late 1990s, the Asian currency crisis sent currencies such as the Thai baht spiraling downward, necessitating international efforts to prevent contagion. Similarly, in the early 1980s, a strong dollar triggered a debt crisis in Latin America. Although emerging market economies today have much stronger foreign exchange reserves and lower levels of external debt, the stronger the dollar, the greater the chance that something will go wrong somewhere in the global financial system.

UBS strategists said investors may not fully appreciate the potential impact of the Trump administration's tariffs. However, recent reports from Bloomberg and The Washington Post suggest the new administration will take a more gradual approach to imposing additional tariffs than Trump suggested during his campaign. More aggressive tariffs could exacerbate the dollar's strength in the coming months.

Fortunately, the dollar's dominance seems to be shaken soon . Tavi Costa, a macro strategist at Crescat Capital, mentioned in a recent report that 2025 will be a key turning point for the dollar and emphasized its impact on gold, silver and global markets. Historical dollar cycles provide valuable references, with long-term cycles alternating between dollar appreciation and depreciation. The United States' aggressive fiscal expansion is creating vulnerabilities that could accelerate reversal.

Costa noted that U.S. stock market valuations are higher than before the Great Depression in 1929, and he would not be surprised if a big shock occurred in early 2025. This would cause the dollar to depreciate and open the next chapter of macroeconomics in the next few years. For investors, the possible peak of the dollar provides opportunities for tangible assets such as gold and silver. Gold's performance can hedge against irresponsible fiscal policies and currency depreciation , and as central banks continue to increase their purchases, gold's appeal will only grow.

Inflation and interest rates remain the key variables in this equation. Despite progress in bringing inflation down from its 2022 highs, structural issues such as deglobalization and underinvestment in commodity production may keep inflation high. However, it is objectively necessary for the Fed to cut interest rates significantly, and if there is any kind of shock in the market, the Fed will take the opportunity to cut interest rates further. In the next six months, we may see the Fed cut interest rates significantly.

The strength of the U.S. dollar has a profound impact on the global economy, especially on the performance of U.S. companies and the stability of global financial markets. Although the strength of the U.S. dollar has its drivers, its dominance may not last long. Investors should pay close attention to the trend of the U.S. dollar and its impact on gold, silver and other tangible assets to prepare for possible market fluctuations and policy changes.