The US markets have cheered the victory of Donald Trump in the US Presidential election that was held early in November. Since then, the US dollar index has surged from around 103 to 108 and the Dow Jones Industrial Average touched a record high of 45,000. Trump’s “America First” policy and the election promises of levying tariffs on imports into the US, tax cuts and deportation of illegal immigrants have given a push to the greenback and the US equity markets. The US dollar was a major beneficiary of the tariff war in Trump’s first Presidency. Here is our analysis on the impact of Trump’s policies and how the dollar index can perform going into 2025.

Tariff war

In his first tenure — let’s call it Trump 1.0 from here — the tariff war began from the second year (2018) of the Presidency. But now, things can be very different, and it looks like it can begin from Day 1. There has already been more noise on the tariff front post the elections. A week ago, Trump announced that he will impose a 25 per cent tariff of imports from Canada and Mexico, and 10 per cent above any existing tariff on imports from China. These three countries are the US’ largest trading partners.

According to the data from the US Census Bureau, these three countries account for 41 per cent of the total imports in the US. Within this, Canada and Mexico together contribute 28 per cent and China 13 per cent of the total US imports. Crude Oil and gas products from Canada,  auto parts from Mexico and electronic goods from China are the major import components from these countries.

During the tariff war in 2018 (Trump 1.0), the dollar index rose about 8 per cent from its low of 89 in February 2018 to 96.50 by the end of that year. This time, the index had surged about 5 per cent from around 103 to touch 108 in just two weeks after the Presidential election outcome. But last week, the index came down, giving back some of the gains and it is currently around 105.80.

The greenback can continue to remain supported going forward, as Trump’s new tariff plans become actual orders from January next year. So, on this account, the dollar index is likely to move higher in 2025.

Inflationary pressure

The increase in import tariffs is likely to force the US manufacturers to pass on the cost to the consumers. This could push consumer price inflation higher in the US next year. That, in turn, will either force the US Federal Reserve to either slow down the pace of the interest rate cuts or pause for a while. As such there are high chances for the US Fed Fund Rate (FFR) staying at elevated levels next year rather than coming down drastically.

According to the Fed’s economic forecast released in September, the median Fund Rate is projected to be at 3.4 per cent in December 2025 . This gives room for a 100-basis points rate cut next year. The central bank’s next projection will be released in its December meeting. It will be important to see if there is any revision in its interest rate forecast.

So, to sum up, increase in inflation, high interest rates can push the US Treasury yields higher, going forward. That in turn will take the dollar index up.

Other factors

Apart from the import tariffs, Trump’s plan to cut the corporate tax rates, more job creation for the Americans etc is likely to boost the business sentiment. This can attract foreign investments into the US. So, the dollar demand is likely to stay higher. This can also help the dollar index go up.

On the charts

The strong breakout in the dollar index above 105.50 after the election results is very significant.  That has strengthened the bullish case. Although the index came down last week from the high of 108 now, the bullish breakout still remains valid. The region between 105.50-105 will now act as a strong support. A test of 105.50-105 looks likely in the near term. But after that, the dollar index can rise back again.

A rise from the 105.50-105 support zone can take the dollar index up to 110-112 in the first quarter of 2025. Thereafter, a corrective fall to 109-108 is possible before another leg of rally begins. From a big picture, an eventual break above 112 will have the potential to take the dollar index up to 118-119 in the second or third quarter next year.

This view will go wrong if the dollar index breaks 104 and sustains below it. If that happens, then the dollar index can fall to 100 again. That in turn will continue to keep the dollar index in a sideways range of 100-108 for some more time.

Euro outlook

For the dollar index to rise, it is important to see where the euro (EURUSD: 1.0575) is headed. The euro’s weightage in the dollar index is 57.6 per cent.

On the long-term chart, the euro has a strong resistance around 1.12, which has been holding well. Although the currency looks range bound between 1.05-1.12, the big picture is weak. The euro looks vulnerable to fall towards 1.00-0.98 against the dollar.  In a worst-case scenario, there is a danger of the euro tumbling even towards 0.95-0.93.

To avoid this fall below 1.00, the euro has to make a sustained rise above 1.12, which looks less likely at the moment.

Shrinking yield differential

The differential between the German Bund and the US Treasury yield indicates that the euro can fall to parity and lower. As seen from the chart, the differential between the German Bund 2Yr yield and the US 2Yr Treasury yield has a strong correlation with the euro. The differential is currently at -2.19 per cent. It can fall to -3.4 per cent and -3.5 per cent in the coming months. That can drag the euro down to 0.95, going forward.

Rupee heading down to 90 against the dollar?

The Indian rupee has now largely become a managed currency. The trading volumes in the Exchange Traded Currency Derivatives (ETCD) have seen a drastic fall after the Reserve Bank of India (RBI) revised the transaction limits earlier this year. Data from Securities and Exchange Board of India (SEBI) show that the volume in ETCD has declined sharply to 773.50 lakh contracts (in the first six months of FY25, that is April-September) from the total of 8,519 lakh contracts in FY24.

Since the rupee has been made to move down gradually, we analyse key cross-currency pairs  in order to derive at where the rupee can go next year against the US dollar. The currencies that we have considered for the study are the euro, British pound and the Chinese yuan. Here is the analysis.

Euro and rupee: As we mentioned above, the euro (EURUSD) can fall to 0.95-0.93 next year.

The EURINR Cross (89.20) is looking bearish for a fall to 82 in the coming months. So, a fall to 0.95-0.93 on the euro and the fall to 82 on the EURINR will give a range of 86.30-88.17 for the USDINR.

British pound and rupee: The British pound (GBPUSD: 1.27) is looking mixed and range bound; 1.10-1.40 can be the broad trading range. Within this, the currency can rise to 1.40 first and then come down to 1.2-1.1 next year.

The GBPINR (107.25) has room for a rise to 114 from current levels. But after this rise, the cross can fall to 102-100.

So, the fall to 1.2-1.1 on the GBPUSD and the fall to 102-100 on the GBPINR will give us a range of 83.30-92.70 and an average of 88 for the USDINR pair.

Yuan and rupee: The Chinese yuan (USDCNY: 7.25) has a strong support in the 7.1-7.0 region. The outlook is bullish for the USDCNY pair to rise to 7.45 and 7.6 in the first half of next year.

The CNYINR (11.66) can be broadly range bound between 11.4 and 12.2. Within this, it can fall to 11.4 first. After this fall, a strong rise to 12-12.2 can happen.

So, the eventual rise to 7.45-7.6 on the USDCNY and the rise to 12-12.2 on the CNYINR will give range of 89.40-92.72 on the USDINR pair with an average of 91.05

So, to sum up, the study of cross currencies clearly indicates that the rupee can weaken to 88-90 next year.

On the charts

An independent study of the USDINR chart in itself indicates that the domestic currency can see more weakness next year.

On the charts, the rupee has a strong resistance in the 83.50-83 region. As long as the rupee stays below 83, the outlook is bearish. There is room for the rupee to weaken towards 88-89, going forward. However, this fall could be gradual like what we have been witnessing so far.

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