What’s Next for the Dollar?

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126 Comments November 21, 2024

 
As the U.Sdollar continues to surge in strength, the financial world is left pondering its next moveThe upcoming U.Snon-farm payroll data release stands as a pivotal point for market analysts and investors alike.
Since the fourth quarter of the previous year, the dollar has been on an aggressive upward trajectory

As we look ahead to 2025, investors face a conundrum: although the factors that drove the dollar's rise in Q4 still persist, there is a prevailing belief in the market that much of the positive momentum has already been integrated into current price levels, leading to a crowded short positioning on the dollar.

UBS has indicated that the employment figures to be revealed this Friday could serve as a crucial catalyst for determining the dollar's future course

According to the bank's economists, December's non-farm payroll is anticipated to reveal an increase of 180,000 jobs, surpassing the general market expectation of 160,000.

Shahab Jalinoos and other analysts at UBS noted that to create sufficient momentum against the dollar, employment growth data would need to fall below 100,000, or the unemployment rate would need to rise to at least 4.4%. Such figures would essentially prompt the market to price in the likelihood of at least two 25-basis point cuts this year, with a high possibility of a March interest rate drop. Even in the event of such data, unless accompanied by significant impacts on the stock market, the impending risk of policy announcements is expected to keep the dollar's spot exchange rate from experiencing considerable fluctuations prior to the presidential inauguration.
Despite the mixed market expectations for the dollar, UBS maintains a bullish outlook

They anticipate that the newly elected president’s economic agenda, referred to as “Maganomics,” will provide sustained support for the dollar and trigger buying sentiment among investors.

The dollar has seen an impressive uptick against G10 currencies, with gains reported between 6% to 12% during the fourth quarter of 2024. The market has priced in several policy objectives from the government—such as extensive tariffs, deregulation, and new fiscal policies—as favorable for the dollar

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Additionally, robust economic data from the U.Shas buoyed the dollar’s performance; for instance, the yield on 10-year U.STreasuries rose from a low of 4.15% on December 6 to nearly 4.70%.

Amidst this environment, economic data from overseas remains lackluster, with Europe and the UK posting disappointing PMI figures for DecemberIn Japan, the central bank has also abandoned the anticipated rate hikes, further enhancing the dollar's appeal on the global stage.
As we transition into 2025, forex traders find themselves caught between competing narratives

On one hand, the catalysts that pushed the dollar higher in Q4 remain intact—these include rising real yields on U.S10-year treasuries and expectations of reduced rate cuts by the FedOn the other hand, the market might have fully priced those favorable factors, limiting the dollar's potential for further gains.

The non-farm payroll data slated for release in this decisive moment is set to tilt the scalesIf the figures meet expectations, volatility in the dollar is expected to remain subdued

However, significant deviations from projections could induce sharp fluctuations in its value, particularly if employment growth were to drop below 100,000 or if the unemployment rate increases to 4.4% or higher—conditions which would lend credence to market expectations for multiple rate cuts this year.

Conversely, should the report indicate an employment surge of 220,000 or more, coupled with a drop in the unemployment rate to close to 4.0%, the expected trajectory of rate cuts could shift dramatically, potentially eliminating prior predictions—all while sparking a rush of dollar buying from investors seeking to circumvent missing out on gains.
Furthermore, UBS observes that the traditional sentiment towards data suggests that the market reacts more negatively to soft indicators—such as sentiment or expectation data—than it does positively to hard data like GDP or payroll figures

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