Credit Agricole argues that despite similarities, 2025 will not be a redux of the USD’s 2018 rally driven by Trump-era policies. Differences in economic conditions, monetary policy, and the USD’s current strength suggest that the dynamics underpinning the dollar’s movement will differ significantly from 2018.
Key Points:
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Divergent Economic and Monetary Conditions:
- In 2018, strong US growth and rising inflation prompted the Fed to hike rates by 125bps.
- In contrast, 2025 is expected to see slowing US growth and inflation, leading to further Fed rate cuts, which could temper USD strength.
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Potential Stagflationary Impact:
- The combination of trade tariffs and fiscal stimulus in 2018 supported growth, inflation, and higher US yields.
- In 2025, this same mix could result in stagflationary pressures, complicating but not halting the Fed’s expected easing cycle.
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Stronger USD Starting Point:
- The USD is significantly stronger now than it was in 2018, which could constrain further gains.
- A sharp EUR/USD decline closer to parity could limit the ECB’s ability to ease further, reducing divergence-driven USD upside.
Conclusion:
Credit Agricole acknowledges that Trump’s policy agenda has added upside risks to the USD, but a repeat of 2018’s rally is unlikely. Slower US growth, stagflation risks, and the already strong USD limit the potential for another broad-based surge, suggesting a more nuanced outlook for 2025.
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