The Xe Global Currency Outlook - December 2024

Navigating 2025: the key trends shaping global FX markets

2025 is shaping up to be a year of significant change and volatility in the foreign exchange (FX) markets. Following Donald Trump’s victory in the 2024 U.S. presidential election, the USD has surged, fueled by market speculation about new U.S. economic policies, including substantial tariff hikes and shifts in global trade dynamics. Whether you're a currency market expert or just curious about the forces shaping exchange rates, here’s what you need to know.

A stronger dollar amid uncertainty

The U.S. dollar (USD) is expected to maintain its strength throughout 2025. This resilience stems from the anticipation of higher U.S. inflation, driven by proposed tariff increases, and a recalibration of Federal Reserve (Fed) policies. Although the Fed had been on a path of rate cuts, the balancing risks of inflation and economic growth might force a pause, keeping the USD firm.

Winners and losers in the FX arena

As the global economy reacts to these shifts, some currencies face steeper challenges than others:

At risk of depreciation:

• Euro (EUR): a sluggish Eurozone economy, deeper European Central Bank (ECB) rate cuts, and restrictive trade practices could push EUR/USD below parity.

• British pound (GBP): with a fragile U.K. economy, GBP/USD could slide below 1.2000.

• Australian (AUD) and New Zealand (NZD) dollars: these currencies, sensitive to global economic growth, might see sharp declines—AUD/USD could drop below 0.6000, and NZD/USD to 0.5500.

Stable contenders:

• Canadian dollar (CAD) and Mexican peso (MXN): underpinned by the United States-Mexico-Canada Agreement (USMCA), these currencies are better positioned to weather trade tensions and might even benefit from a stronger U.S. economy.

The impact of U.S. tariffs on trade

The Trump administration’s proposed tariffs on all U.S. imports could reshape the global trade landscape. While the final extent of these tariffs hinges on congressional approval, the potential impact is profound. Key currencies like EUR, GBP, and Chinese yuan (CNY) are especially vulnerable due to their trade exposure to the U.S.

For the AUD and NZD, the risks are even higher. These economies, heavily reliant on global growth, are likely to feel the pressure of escalating trade tensions more acutely than their European counterparts.

Volatility ahead for USD/JPY

The USD/JPY pair presents an interesting dynamic. Japan’s higher Bank of Japan (BoJ) interest rates could strengthen the JPY, while rising U.S. Treasury yields might simultaneously boost the USD. This tug-of-war sets the stage for significant volatility in the year ahead.

Key risks to watch

1. USD surge:

   the USD could strengthen by nearly 10%, returning to levels last seen in September 2022, driven by widespread tariff implementation and domestic tax cuts.

2. Trade wars:

   a dramatic increase in U.S. tariffs could disrupt global trade, slowing economic growth in major economies like the Eurozone and China.

3. Inflation pressures:

   higher tariffs and policy shifts could lift U.S. inflation, influencing Fed decisions and maintaining the USD’s dominance.

4. Emerging market challenges:

   slower global growth and a stronger dollar spell trouble for many emerging market currencies.

Looking ahead

As we navigate this period of economic and political change, staying informed about FX market trends is more critical than ever. Whether you’re managing international transfers or investing globally, understanding the implications of a strong USD and evolving trade policies can help you make more informed decisions.

2025 may be unpredictable, but by keeping an eye on these key developments, you’ll be better prepared to adapt to the shifting global landscape.

Stay tuned for more insights as we track the twists and turns of the FX markets in the year ahead!

Download the Global Currency Outlook (PDF)

The content within this blog post is not intended for use as financial advice. This content is for informational purposes only.