During his 2002 testimony before Congress, then-Federal Reserve Chair Alan Greenspan wryly observed: “There may be more forecasting of exchange rates, with less success, than almost any other economic variable.” Two-plus decades later, predicting the future path of exchange rates continues to pose a challenge, especially as currency matters take centerstage in policy debates.

The dollar was expected to weaken in 2024, with markets initially pricing in six or more Fed rate cuts. Reality, however, played out differently, and the dollar actually rose sharply. U.S. economic growth was more robust than expected and the disinflationary process stalled out in the second half of 2024. Consequently, the first rate cut was delayed till September and the year ended with just three Fed cuts.

Furthermore, the Trump-led Republican sweep in last November’s election led market participants to expect passage of potentially growth-enhancing fiscal measures on the regulatory and tax front. Trade tariffs and restrictive immigration policies, both of which are likely to be inflationary, are also expected to be high on the agenda of the Trump administration. Consequently, Treasury bond yields have risen sharply since the election, providing a boost to the dollar.

Early in 2025, diminished expectations for rate cuts on the back of continued U.S. economic strength and a potential revival of inflationary pressures have led many to

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