【MACRO Alert】Wall Street analysts predict the trend of the U.S. dollar and the impact of Trump's pol

Wall Street analysts generally predict that the dollar may peak in the middle of next year and then begin to decline, predicting that it may fall by 6% by the end of the year. This forecast is mainly based on considerations of U.S. President-elect Trump's policies and the Federal Reserve's interest rate cuts, which may put pressure on the dollar in the second half of 2025.

The dollar has risen significantly so far this year and is on track for its biggest annual gain since 2015. The upward trend is partly due to Trump's victory in the U.S. presidential election and strong economic data that led to lower expectations for the number of future interest rate cuts by the Federal Reserve. However, Kit Juckes, head of currency strategy at Societe Generale, warned that the dollar's current strength may not be sustainable.

The Bloomberg Dollar Spot Index has risen about 6.3% this year, with most of the gains concentrated around the election in early November. The dollar's gains have been driven by expectations that Trump's tariffs and tax cuts will spur inflation, complicating the Fed's task of lowering interest rates. Morgan Stanley strategists believe that while the dollar may rise in the short term due to Trump's policies, it is expected to fall below current levels by next year. They noted that falling U.S. real interest rates and rising risk appetite would make the dollar one of the most bearish currencies.

Trump's tough stance on trade, including his promise to impose steep tariffs on Mexican and Canadian goods, has caused the Mexican peso and Canadian dollar to slide, while his challenge to the dollar's status as the world's dominant currency has also affected global currency markets.

Meanwhile, a Financial Times survey showed that economists are concerned that the Trump administration's policies could stoke inflation and make the Federal Reserve more cautious about cutting interest rates. Compared with the September survey, the December survey showed that economists raised their forecasts for the federal funds rate next year, with the vast majority of respondents believing that the rate will remain at 3.5% or higher by the end of 2025.

Economists expect the Fed to reduce the number of rate cuts it plans to make by the end of next year. If the Fed cuts by 25 basis points as expected at this week's meeting, the policy rate will remain at 4.25-4.5%. Jonathan Wright said that downside risks to the labor market have decreased, while progress on inflation seems to have stalled, which may make the Fed less likely to rush to cut interest rates.

Tara Sinclair believes the Fed may extend its pause in rate cuts after its December cut and keep rates steady for the rest of next year. Officials are plotting how quickly to reach a "neutral" policy rate that neither stimulates nor suppresses growth, but Fed Chairman Powell acknowledged that policymakers don't know exactly where that level is.

Trump's return to the White House will have a huge impact on the Fed's policy outlook. The survey showed that just over 60% of economists believed that Trump's plans would have a negative impact on US growth. Most respondents were also prepared for higher inflation if Trump's plans to impose universal tariffs and high taxes on China became a reality.

Just over 80% of the 47 economists surveyed said the core personal expenditures price index (PCE), which excludes food and energy prices, would not fall below 2% until January 2026 or later. The median forecast for core PCE inflation over the next 12 months also rose to 2.5% from 2.2% compared with the September survey. Fears of a recession are also remote , even as the median forecast for real GDP growth next year rose to 2.3% from 2% in September.

But Sinclair warned that Trump's policies will start to have an impact. She said this policy mix is not good in the long run. Economists warned that this period could be difficult for the Fed and there could be a "confrontation" between Trump and Powell if the central bank is forced to keep interest rates high to offset the impact of Trump's policies. Wright said the Fed will be "more nervous" about inflation than in the past given the surge in price pressures after the COVID-19 pandemic.