The US dollar – on a DXY basis – advanced 7.0% in 2024 on a closing basis and marked the third year in four in which the dollar appreciated on a yearly basis. But the calendar year basis performance hides the fact that the strength of the dollar was entirely a Q4 episode, fuelled by expectations and then confirmation of Donald Trump winning the presidential election. From a year-to-date low on 27th September to the year-to-date high in December, the dollar gained by a substantial 8.4%. The scale of the quarterly move (intra-day low-to-high) was the largest since Q3 2022 when market participants were pricing the worst-case scenario for Europe following Russia’s invasion of Ukraine. In a six-quarter period post-covid (Q2 2021) through to the post-Ukraine invasion high (Q3 2022), the dollar advanced by an astonishing 28%. We are below that high in 2022 now but from a valuation perspective we would still argue that the dollar is at expensive levels and hence the scope for large appreciation going forward is much more limited. Indeed, the dollar in real effective exchange rate terms is very elevated. Based on election day levels the REER value of the dollar on election day in 2024 was at the strongest level since the 1984 election. What followed then was the Plaza Accord to weaken the value of the dollar. Might we have a similar accord attempted by President-elect Trump? We don’t think so and we believe there are many conflicting factors for dollar performance under a Trump presidency and to assume sustained dollar strength likely misses numerous complications that we believe points to a less favourable outlook for the dollar. - MUFG
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