Dollar dominates 2024 with strongest annual gain in a decade

The dollar surged Tuesday, recording its strongest annual performance in nearly a decade, fueled by the resilience of the U.S. economy and President-elect Donald Trump’s policies. His agenda, which includes tax cuts and tariffs, promises to keep interest rates elevated and bolster the currency’s strength.

The Bloomberg Dollar Index reached its highest point since November 2022, closing the year up about 8%, its best performance since 2015. This rally was driven by unexpected and sustained economic growth, prompting traders to scale back expectations of aggressive monetary easing by the Federal Reserve.

A dollar on the rise

Bloomberg analysts predict that the dollar’s momentum could carry into early 2025, supported by the Federal Reserve’s cautious stance on additional rate cuts. In contrast, other central banks are expected to reduce rates more rapidly, creating a favorable environment for dollar strength. This divergence has attracted investors to the U.S. market, further boosting the dollar’s value.

The dollar posted gains against all major currencies in 2024, with the New Zealand dollar, Norwegian krone, and Japanese yen experiencing the steepest declines.

“Trump’s initial policies are likely to reinforce the dollar’s strength in early 2025,” Jayati Bharadwaj, currency strategist at TD Securities, told Bloomberg. She noted that while the Federal Reserve is expected to ease monetary policy in the second half of 2025, such a shift could mark a turning point for the dollar’s dominance, particularly if other central banks maintain steady policies.

Investor confidence in the dollar has reached new heights. Hedge funds and asset managers increased their collective bullish bets on the dollar to around $29.8 billion, the highest level of optimism since April. The currency’s impressive rally has cemented its position as a key player in global markets.

Temporary momentum?

Despite the dollar’s strong performance, some experts question how long its upward trend can last. With much of the Federal Reserve’s policy path already priced into the market, the currency’s momentum may begin to wane in the coming months.

“We are moderately optimistic about the dollar,” Sarah Ying, head of currency strategy at CIBC Capital Markets, told Bloomberg. “While the dollar has performed exceptionally well, we believe its momentum could weaken by the second quarter of 2025.”

As the new year begins, the dollar remains a symbol of economic strength, though questions about its long-term trajectory are likely to shape global markets in the months ahead.