The dollar is headed for its best year in nearly a decade

The US dollar is absolutely crushing it this year. It’s on track to clock its best performance since 2015, riding high on the back of a powerhouse US economy, a cautious Federal Reserve, and market enthusiasm fueled by President-elect Donald Trump’s aggressive tariff threats.

The Bloomberg Dollar Spot Index, which tracks the currency’s performance against a basket of global peers, has already jumped more than 7% in 2024, cementing the dollar’s supremacy in a world where other currencies are barely keeping up.

The greenback even hit a two-year high earlier this month after the Federal Reserve trimmed rates slightly but made it clear they weren’t rushing to slash further.

Global currencies in free fall

While the dollar is out here thriving, its competitors are flatlining. The yen, Norwegian krone, and New Zealand dollar have all tanked by more than 10% against the dollar this year. It’s a bloodbath for the euro too, which has lost about 5.5% of its value, now at $1.04.

And it doesn’t stop there. Analysts are bracing for the euro to hit parity with the dollar next year. The global FX market isn’t just taking Ls—it’s getting battered by speculative traders doubling down on the dollar.

Non-commercial traders have piled up $28.2 billion worth of bullish contracts tied to the greenback, the most since May. According to Goldman Sachs analysts, markets are still underestimating the impact of Trump’s protectionist tariffs.

“Dollar strength is consistent with incoming data,” the analysts wrote, adding that the US economy might keep outperforming despite global trade tensions.

If you’re watching the dollar index, it’s set to end the year with a 6% gain. For context, that’s like LeBron James dropping 50 points on a court full of middle-schoolers. Against the yen, the dollar has soared nearly 12% this year. Despite a slight pullback, the euro remains stuck at its lowest level in two years.

Japan’s central bank isn’t doing much to fight back either. The Bank of Japan (BoJ) just left rates untouched, with Governor Kazuo Ueda saying he’d rather “wait for clarity” on Trump’s policies. It’s a hesitant move, but who can blame them?

Fed, Treasury yields, and Trump

Meanwhile, the Federal Reserve is playing a calculated game. Jerome Powell, the Fed chair, announced earlier this month that rate cuts will be slow and steady. This has traders betting on fewer cuts in 2025—only 37 basis points are priced in, and the first full cut isn’t expected until June.

But Treasury yields are adding fuel to the dollar’s fire. The 10-year yield climbed to 4.641% earlier this week, its highest since May, and the two-year yield is holding steady at 4.32%. Higher yields mean more demand for US assets, which keeps the dollar strong.

And then there’s Trump. Love him or hate him, his plans for tariffs, deregulation, and tax cuts are sending shockwaves through the global economy. Economists see his policies as both pro-growth and inflationary, giving the dollar another edge.

While other central banks like the European Central Bank (ECB) are bracing for deep rate cuts—possibly as much as a full percentage point next year—the US is holding the line.

The collateral damage: Commodities and crypto

The dollar’s rise is putting pressure on other markets too. Gold, the classic “safe haven” asset, dipped 0.84% to $2,612.20 per ounce. Even with this drop, it’s on track for a 27% annual gain, the best performance since 2011. Blame geopolitical tensions and inflation fears for that one.

Oil is also feeling the heat. Brent crude futures ticked up 1% to $73.99 a barrel, but the market is nervously waiting on China’s next move. The world’s largest crude importer is expected to announce new economic stimulus measures, which could shake things up.

And then there’s Bitcoin. The king of crypto is sitting at $93,752.64 as of December 27. It’s down slightly from its daily high of $97,554 but still riding an epic rally. Bitcoin’s market cap stands at $1.86 trillion, with $48.49 billion in trading volume over the last 24 hours.

Traders are bracing for chaos as $14.5 billion worth of Bitcoin options expire today. Call options are outpacing puts by a massive margin, meaning the sentiment is still pretty bullish. If Bitcoin closes above $105,000, it could lock in serious momentum heading into 2025.

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