Reasons for the high upward trend of the US dollar index

After the pandemic, the overall global economy has declined, but the recovery momentum of US GDP is strong. The US GDP grew by 2.7% year-on-year in the third quarter of 2024, although slightly slower than the previous quarter. But compared to other major economies, the advantages are still evident. The resilience of the US economy is mainly due to the strong consumer market, stable job market, and continuous promotion of technological innovation. In addition, the United States dominates in high-tech fields such as AI and semiconductors. Attracted a large amount of investment and further promoted economic growth.

Not long ago, the Federal Reserve announced a rate cut, aimed at addressing the easing of inflationary pressures and slowing economic growth. Some investors expect the Federal Reserve to halt interest rate cuts in 2025. Even reconsider the possibility of raising interest rates. Federal Reserve Chairman Powell stated at a press conference in November. The pace of future interest rate cuts will depend on changes in economic data, especially inflation and the performance of the job market. He emphasized that if inflation continues to fall below the 2% target, the Federal Reserve may further cut interest rates; But if the economy remains strong and inflation cannot continue to approach 2%, the Federal Reserve can relax policy constraints more slowly. The flexibility and uncertainty of this policy provide support for the rise of the US dollar index.

In 2024, the global geopolitical situation will remain tense, and factors such as the continuation of the Russia-Ukraine conflict, the escalation of the Palestinian Israeli conflict, and the instability in the Middle East will intensify the risk aversion of the market. As a gold standard currency, the US dollar is naturally favored. For example, the ongoing Israeli Palestinian conflict poses potential risks to energy supply in the Middle East, and oil prices will be affected. Investors from various countries exchanged their assets for US dollars, driving up the US dollar index. In addition, the stability of the domestic political situation in the United States has also enhanced the safe haven nature of the US dollar. Although Trump has been re elected as the President of the United States. However, the continuity of its policies and the stability of the US political system have led to relatively strong market confidence in the US economy and the US dollar.

During the rise of the US dollar index, the weakness of its competitor, the euro, was also one of the driving factors. The economic growth in the Eurozone is sluggish, far below market expectations. The European Central Bank also entered a cycle of interest rate cuts in 2024 to cope with the slowdown in economic growth and the decrease in inflationary pressures. The significant depreciation of the euro against the US dollar has also driven up the US dollar index. The UK economy is also facing challenges. In the third quarter of 2024, the UK economy had zero month on month growth, but the inflation rate rose to 2.6%. The Bank of England also announced a 25 basis point interest rate cut. To stimulate economic growth. In terms of the Japanese yen, although the Bank of Japan maintained a relatively stable monetary policy in 2024, the yen depreciated against the US dollar due to the fragility of Japan's economic growth and low inflation. The weakness of these currencies further enhances the value of the US dollar in the international monetary system.

The rise of the US dollar index will have a negative impact on other parts of the United States, and Trump has expressed his preference for a "weak dollar" more than once during the campaign.

The US financial market is significantly affected by the appreciation of the US dollar.

Firstly, the rise of the US dollar usually causes fluctuations in the US stock market. When the US dollar rises, investors may transfer funds from the stock market to US dollar assets. This leads to a decline in the stock market. In 2024, the US stock market experienced several significant fluctuations. Part of the reason is due to the impact of the rising US dollar.

Secondly, the rise of the US dollar will also affect the US bond market. A higher dollar usually drives the yield of US treasury bond bonds higher. Because investors expect the Federal Reserve to adopt a tightening policy to cope with inflationary pressures caused by the appreciation of the US dollar.

Former US Treasury Secretary John Connolly once said, "Our currency, your problem." Overall, the US dollar may still be a big 'trouble' in 2025. Countries can only cope with exchange rate risks by continuing to increase their US dollar asset reserves, depreciating their own currencies to increase exports, and other means.