FX168 Financial News (North America) reports that Wall Street is beginning to adopt a bearish outlook on the USD, as the policies of elected President Donald Trump and potential interest rate cuts by the Federal Reserve may exert pressure on the dollar in the second half of 2025.

From Morgan Stanley to JPMorgan, about six bearish strategists now predict that the world's reserve currency will peak as early as mid-next year and then begin to decline, with French Banks estimating a 6% drop in the ICE USD Index by the end of next year.

Due to Trump's victory in the U.S. presidential election and strong economic data leading traders to lower their predictions for Fed interest rate cuts next year, the dollar has soared this year and is expected to see the largest rebound since 2015.

Kit Juckes, head of currency strategy at Fal Bank, stated that the dollar's strength is a "short-lived fluctuation." "We are pushing asset prices toward levels that are unsustainable in the long run."

So far this year, the Bloomberg USD Spot Index has risen by about 6.3%, a significant portion of which occurred before and since election day in early November. Trump's tariffs and tax cuts will fuel inflation and complicate the Fed's mission to lower interest rates in the coming months, triggering the rebound. This provides a motivation for global investors to move funds into the USA.

They wrote that while Morgan Stanley's macro and currency strategists, including Matthew Hornbach and James Lord, believe the dollar has been buoyed by these threats, ultimately by this time next year, the dollar will drop below current levels. They added that a combination of declining U.S. real interest rates and improved risk appetite creates the most bearish USD scenario.

Currently, Trump has been intensifying his hawkish rhetoric on trade, recently committing to impose a 25% tariff on goods from Mexico and Canada to address immigration and drug-related border issues, which has strengthened the Mexican peso and Canadian dollar. Earlier this month, Trump criticized a group of emerging economies for challenging the USD's status as the world's premier currency.

The recent strength of the dollar has led to weakness in non-USD currencies. Following the U.S. election, the euro fell to its lowest point in two years in November, nearing parity. According to reports from last week, MSCI Inc.'s Emerging Markets Currency Index is currently trading at a four-month low, while China may devalue the yuan to 7.50 next year — a level last seen in 2007.

According to CitiGroup strategists led by Daniel Tobon, any resolution regarding a possible trade war under Trump's second term will disappoint the dollar bull market, as many believe the president-elect's view on trade fundamentally supports the dollar.

According to Bloomberg's compilation of data from the Commodity Futures Trading Commission for the week ending December 10, speculative, non-commercial traders are still holding the dollar flat at about 24 billion dollars, close to the highest level since May. This group has been bullish since mid-October before the elections.

Imminent threat.

When it comes to viewing the path of the dollar during Trump's presidency, history provides some guidance. After immediately ramping up when Trump was elected eight years ago, the Bloomberg Dollar Index recorded its largest annual decline ever in 2017, as the US economy lost momentum while growth in Europe rebounded.

Analysts at MUFG led by Derek Halpenny indicate that Wall Street believes the downturn will not be as severe this time, but the dollar may peak in the first half of 2025.

Compared to the euphoria of the dollar's appreciation in November after Trump's victory, even the options market is pricing for dollar appreciation next year, which has somewhat adjusted the bullish expectations.

The one-year risk reversal for Bloomberg currency benchmarks is about 1%, bullish this week, down from about four-month highs a month ago, indicating that traders are still seeking dollar gains, but the bullish sentiment has stagnated.

For Sophia Drossos, a strategist and economist at Point72 Asset Management, there is so much positive news for the dollar that any growth outside the USA—particularly as the European Central Bank and Bank of England are cutting rates to help mitigate downside risks—will weaken the dollar relative to its peers.

Drossos said: "The global economy will be strong next year, with some very good foundations."

Top currency strategists expect that the biggest support for the USD in recent months—the Federal Reserve—will further become a liability in 2025.

Morgan Stanley's interest rate strategists indicate that US yields are expected to decline faster than yields in other parts of the world next year, which will compress the longstanding advantages for the USD.

Nevertheless, the USD weakness is far from the prevailing consensus on Wall Street.

At Wells Fargo & Co, strategists believe that relative central bank policies around the world support the USD rather than drag it down. In a one-year advance notice to clients, they wrote that they expect the USD to appreciate about 5% to 6% against the G10 peers by 2025.

Brendan McKenna, an emerging markets economist and Forex strategist at Wells Fargo & Co in New York, stated: "Monetary policy will be the main source of USD strength next year." "We believe that the Federal Reserve will move in a less dovish direction, while other major central banks like the European Central Bank will become more dovish."

Meanwhile, other experts argue that if Trump's trade policies are enacted, the USD will further strengthen, as theoretically, tariffs will raise the prices of any imports used by US manufacturers.

Barry Eichengreen, an economist at the University of California, Berkeley, said: "If tariffs make Steel and Aluminum more expensive, that would create a negative supply shock for the land Autos industry that uses these imported inputs." He has spent decades studying the Global monetary system.

Then there is the threat of an expanding budget deficit and an increase in the periodic premium on USA Bonds, which serves as a measure of the perceived risk of holding long-term government debt.

Analysts from JPMorgan, led by Global Forex Strategy co-head Meera Chandan, wrote in the 2025 outlook: "When the Federal Reserve significantly slows, and the USD loses its relative yield/growth advantage, the dollar could weaken excessively."