Currencies Strike Back
Currencies Strike Back
There are reasons to believe the U.S dollar will appreciate in 2025 and reasons to believe it will not.
While there is never an easy year to forecast, 2025 might prove exceptionally difficult. The anticipation of the U.S. president-elect Donald Trump’s new administration and the subsequent rollout of policies are likely to have profound impacts on currency markets.
The question is whether 2025, like a movie trailer with too many spoilers, will be predictable, or will it offer an unusually suspicious plot twist? Just as 2024 was a volatile year with varied results at many points in time, 2025 could be characterized as a movie that has three acts. In fact, at the time of this writing, we have already begun the first act.
Currencies had Significant Shifts in 2024
Source: Bloomberg LP as of November 14, 2024. Past performance is not indicative of future results
ACT I: Dollar Days
In this act, the U.S. dollar (USD) is the protagonist and it is running strong. This act already started in late 2024, so maybe it’s technically a prequel.- Look for USD appreciation to multi-year highs.
- We believe Trump’s mandate is strong, and he will push policies forward early and aggressively.
- Tariffs: As noted in AGF Investments Inc.’s recent U.S. election primer, studies suggest that tariffs tend to appreciate the currency of the country imposing the tariffs and weaken the currency impacted by tariffs.
- Inflation in the U.S. from looser fiscal policy and tariffs could truncate the U.S. Federal Reserve (Fed)’s rate cutting cycle, helping to boost the USD. The USD could remain the highest, or amongst the highest, carry currencies in the developed world, even as central banks likely need to continue lowering their rates.
- U.S. exceptionalism, from policies designed to keep investment in the U.S., draw foreign investments to the U.S.
- The trade agreement, United States-Mexico-Canada Agreement (USMCA), between Canada, Mexico and the U.S. may be revisited, putting currencies like our Canadian dollar under pressure.
- USD is still the dominant reserve currency.
ACT II: We Discover Flaws
- USD retreats back to average levels seen in the past couple of years.
- Adoption of a weak USD policy: It is one thing to have a stable currency, or a modestly cheaper currency. Pursuing a weak USD policy could unravel confidence, quickly resulting in a sharp depreciation.
- Fiscal concerns: Like a character in a horror movie wandering out into the dark to investigate a noise, is the U.S. heading into a fiscal crisis? Markets know the risk. We know the risk. While a fiscal scare may prompt safe-haven flows and lead to USD strength, anything more damaging could seriously erode the reserve currency status of the USD.
- Tarnishing the reserve status: The points above contribute to an erosion of confidence in the U.S. Meddling with the Fed, or its mandate, could also cause damage. Overuse of tariffs could lead to the world fragmenting further away from reliance on the U.S.
ACT III: Into the Darkness (coming not too soon ... 2025? 2026? In 15 years?)
In the absence of clarity on how long the first two acts last, we can look at some longer-run themes to focus on:- Demographics suggest a slower growth rate of aggregate demand. But it also means a lower supply of labour. As the world ages, the propensity to consume declines. The working-age population shrinks compared to the general population, but also risks shrinking in absolute terms. Lower growth and higher inflation could be the result. Countries able to balance policies to support growth while limiting inflation could attract longer-term flows.
- In a world that is moving away from globalization, economic cycles are likely to be shorter and more volatile. A result of this is also likely to be structurally higher inflation with higher volatility. Central bank policymakers will raise rates to combat inflation, but their work might be complicated by the volatility. Interest rate-based strategies for currencies may become less reliable (but they could also become more rewarding). Steadier economies with decent real interest rates are likely to be more appealing for long-term investors.
- Demographics and de-globalization may both lead to strength in currencies with similar profiles. How 2025 unfolds may determine whether the USD benefits from these factors for years to come.
As Co-Head of Fixed Income, Tom brings more than 15 years of experience managing a wide array of portfolios and is a key contributor to the team's analysis of the global macroeconomic landscape, with specific emphasis on currencies. He is responsible for developing currency strategy and providing counsel on the implications of currency moves for the firm.
He also serves as a portfolio manager of AGF Total Return Bond Fund/Class, AGF Emerging Markets Bond Fund and AGF Global Opportunities Bond ETF, and has served on the AGF Investments Asset Allocation Committee since 2016.
Tom earned a Bachelor of Commerce from the University of Toronto. He is a CFA® charterholder and a member of CFA® Society Toronto.
As part of the Currency Strategy and Management Team, Sherry is focused on analytical support of research, trading and portfolio monitoring. She is also responsible for assisting in the development of new tools, models and reports to aid in currency management and strategy. Additionally, she actively supports the Fixed Income Team’s money market activities.
Before taking on this role, Sherry worked in Investment Operations at AGF Investments, developing and maintaining portfolio management workflows, valuations models and reconciliation models.. Prior to joining the firm, she gained experience working as an analyst in ETF operations and client services.
Sherry holds an MBA in Investment Management from Concordia University, a Bachelor of Mathematical Economics from the University of Waterloo and a Bachelors Degree in Finance from Beijing Jiaotong University. She is also a CFA® charterholder.
The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
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