What’s Fueling the US Dollar’s Strength in 2024?

The US dollar has maintained an ever-increasing performance in the year 2024, which is clearly seen in the Dollar Index, which has grown by about 6% since the month of October where it has had and continues to have a steady growth. At the moment, the EUR/USD currency pair is being traded at 1.05 meaning it’s at a one-year low while the USD/JPY has reached a level that is raising concern to authorities in Japan. This provokes the question, what may be the reasons for the dollar’s great increase?

Trump’s Second Term and Republican Control

One of the dollar’s greatest tailwinds in the present circumstances is the politics in the US. For instance, a second term of President Donald Trump and the Republicans dominating the Congress has resulted in developments that have made the investors anticipate a loading of policies beneficial to the dollar. Among them are domestic tax cuts and protective tariffs that aim at enhancing the competitive position of the US manufacturing sector. Such policies have in the past resulted in an enduring loading of the US economy and dollar by investors.

The Federal Reserve's Rate Policies

Additionally, the Federal Reserve’s strategy towards money issuing has lashed the dollar. The central bank has high interest rates aimed at controlling inflation still making US assets more attractive to the investors. Of course, high rates lead to big gains from U.S. bonds and other assets, thus luring foreign capital into the U.S. and the push for the dollar rises.

U.S. Dollar Soars as a result of Trump Clinches Victory in 2024 Election

After Trump’s landslide victory in both the House and Senate branches of the US government and the presidential race held in the last elections, the U.S. dollar plummeted against all major global currencies. Thus, the bulk of this rise has been driven by a rapid increase in U.S. bond yields, making the dollar more attractive and market expectations of Trump’s policies, such as tax cuts and tariff hikes.

The euro, Japanese yen, and British pound, respectively, recorded the most losses, with the euro decreasing by nearly two percent, as investors spread their funds over stock markets, which have opened a widening yield gap between the U.S. and Europe. Additional to that, the possibility of tariff would devastatingly impact Europe, if the trade conflict between U.S. and the EU escalates, which is one of the reasons for the increase of the U.S dollar exchange rate as a safe-heaven currency.

Now, the Fed’s instruments that could cause an exchange rate change are going to be scrutinized like never before. As for the investable side, the expected increase in U.S. interest rates and the removal of foreign military troops/amodels that aggravate geopolitical tensions in Trump’s second term are two of the factors that may keep the greenback strong in the near future.

The Dollar’s Dominance in Global Trade

Although the U. S. economy has roadblocks to overcome, the dollar is the currency used in the world’s exchange, particularly in commodities like oil and gold. The ongoing worldwide need for the U.S. greenback increases its value and keeps it strong.

Outlook for the Future

The USD, even though it is rock solid - in the short-term it may face some difficulty. A few economists see the dollar declining over the medium term especially against the European currencies like the euro. The ongoing dissimilarities in the economy of the US against the Eurozone will likely result in a slow recovery of the EUR/USD exchange rate with investors paying more attention to the economic basics than the political factors. Also, the US fiscal policies that are expected to widen the twin deficits which in turn may cause the long-term dollar risk to be higher have been funded.

Conclusion

The fact that the dollar has gained such a big value in 2024 is due to several drivers, mainly, the political events which include Trump's second term and the ruling Republican Party as well as, the Federal Reserve's harsh interest rate policies. Therefore, the dollar is experiencing more than usual engagement from the investors, higher bond yields, and the so-called “tax cut and protectionist tariffs” which are going to come. Nevertheless, the dollar, despite retaining its strength over the short term, yet, remains the future is still out there. Likely geopolitical tensions, economic disparities between the U.S. and the EU, and the policies that might trigger deficits will be the factors to make the dollar lose its hands-on power in the future. That being said, the dollar’s dominance not only in commodities but also in global trade is still intact and it is still the world's most powerful currency.