Strong dollar shows no signs of weakening
The U.S. Dollar Index rose about 6% in 2024. It closed on Dec. 31 at its highest point of the year.
Bloomberg calculates that the greenback made its biggest gain last year in nearly a decade. It starts 2025 with some momentum for further gains, continuing a rally that started in early fall when the Federal Reserve started cutting U.S. interest rates amid persistently strong economic growth.
The strength of the dollar relative to other major currencies reflects the strength of the U.S. economy, according to Eswar Prasad at Cornell University.
“The U.S. economy is doing very well, and the rest of the world is floundering,” he said. “China, Germany, Japan and even India are all losing growth momentum.”
What’s coming soon from the Trump administration could deepen the divide.
“Tariffs are actually going to hurt the rest of the world a lot more than the U.S.,” Prasad said, as most other countries depend a lot more on exports and trade than we do.
Meanwhile, inflation in the U.S. remains stubbornly above the Federal Reserve’s 2% target, meaning the Fed will likely leave interest rates here higher for longer compared to other major central banks — which will also drive the dollar higher.
“If you go back to Finance 101 textbooks, one of the first things we learn is interest rate differentials and the impact on currencies. With higher interest rates in one location relative to another, that typically begets flows into that currency that offers more yield,” explained Bill Merz, head of capital market research at U.S. Bank.
So more foreign investment will flow into the U.S., and so will more cheap imports — which is good for U.S. consumers. But U.S. exporters’ products become more expensive for customers abroad.
Others suffer from a strong dollar as well, per Ross Mayfield, an investment strategist at Baird — which is a Marketplace underwriter.
“If you’re a U.S. investor and you own Chinese stocks — and for corporate profits earned overseas — if you translate those profits back to U.S. dollars, you have less at the end of the day,” he said.
Finally, added Mayfield, the dollar is a safe-haven asset. “So when times are good and the U.S. economy is strong, it’s the place to be. And when things are scary, it’s the place to be.”
All of that is to say, the dollar’s likely to remain strong through 2025, Mayfield noted.
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