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The US dollar has had an impressive 2024, establishing itself as a safe haven in a year marked by unexpected political and economic events around the world. Although technological advances and US economic “exceptionalism” have boosted US growth, productivity and stocks, the dollar has also benefited significantly from the crises that have hit its global rivals.
A clear example of this dynamic was seen this week with the surprise political upheaval in South Korea. The unleashed uncertainty took the won to two-year lows, with its worst day in eight years.
Although the won accounts for only 2% of daily foreign exchange market volume, South Korea is Asia’s fourth-largest economy, and this volatility has further darkened the outlook for emerging markets, especially in Asia.
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The keys behind the strength of the dollar
Crisis in other key economies
- The euro zone faces anemic growth, with Germany weakened and France in political crisis.
- China is on the brink of deflation as it faces trade uncertainties under the Donald Trump administration.
- Japan sees the yen at its lowest point in 33 years.
- Brazil is grappling with fiscal fears that have driven the real to historic lows.
Dollar performance against other markets
Although the dollar index is up 4.7% this year, the momentum appears moderate, considering the magnitude of record foreign capital inflows into U.S. stocks. Additionally, the Federal Reserve has defied initial expectations for aggressive rate cuts, further strengthening the dollar.
Since October, the dollar index has appreciated strongly against the main currencies. Source: Investing.com
Outlook for 2025
With the dollar near its strongest level in two decades, doubts about its ability to continue appreciating are growing. Although the weakness of their rivals has been an advantage, their ability to shine on their own merits will be key next year.
What’s next for the dollar?
The outlook for the dollar will depend on two key factors:
- Recovery of rival economies: If the euro zone or China manage to overcome their challenges, they could take away the dollar’s prominence.
- Market positioning: Investors are already highly focused on the dollar, making future gains more difficult to achieve.
In a currency market where bets are always relative, 2024 could mark a turning point for the dollar. While its leadership appears secure in the short term, its ability to maintain the crown will depend on how other global players adjust their strategies.
The dollar has shown remarkable resilience this year, but the challenge next year will be to keep pace in a global market that is constantly redefining its priorities.
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