Dollar outperformance to continue, but run will cool as policy uncertainty fades

Investing.com — The dollar will likely continue to outmuscle its G10 rivals in the months ahead, supported by economic strength, before turning lower in the back half of 2025 as investors reassess the election impact and the Fed delivers more rate cuts, analysts from BofA said in a recent note.

“We are first looking for continued dollar support for the next several months on back of ongoing economic outperformance in the US, as we await further clarity from Washington on a number of expected policy changes,” BofA analysts noted. 

The dollar’s trajectory is likely to shift in the latter half of 2025 as the boost from the pricing in a pro-growth economy under a second Donald Trump administration runs out of road. “Further out, however, we see USD strength ultimately starting to moderate this year as well,” the analysts said.

They expect the dollar to weaken as the market has already priced in expectations for maximalist economic policy announcements, while many growth implications are not yet factored in.

While the “US exceptionalism” narrative has driven dollar strength, there’s scope for normalization as Washington provides more clarity on policies, they added.

The analysts’ call for the dollar to soften is predicated on a softer landing for the U.S. economy next year, with conditions paving the way for further Fed cuts. The analysts expect  this to ultimately “jumpstart” a moderation in dollar strength during the second half of 2025, after trading close to current levels through mid-year.