Synopsis:

MUFG anticipates significant USD strength in early 2025 fueled by trade tariffs, deportations, and tax cuts, but expects the rally to peak in the first half as economic growth slows and Fed rate cuts follow.

Key Points:

• Post-Election Dollar Rally:

  • The US dollar (DXY) has strengthened in response to Donald Trump’s election victory, consistent with MUFG’s prior forecast of a 7-8% rally on a Trump win.
  • Key drivers include expectations of higher growth, inflation, and corporate earnings, alongside a shift in Fed policy expectations.

• Aggressive Policy Rollout in January:

  • Trump’s cabinet picks, including Howard Lutnick as Commerce Secretary and Jamieson Greer as US Trade Representative, underscore an accelerated timeline for trade tariff implementation, especially targeting China, Canada, and Mexico.
  • Trade tariffs on all imports, deportation measures, and tax cut initiatives are expected to begin immediately in January, mirroring the 2017 Tax Cuts and Jobs Act.

• Market and Fed Policy Implications:

  • Inflationary pressures from tariffs and tax cuts have tempered expectations for Fed rate cuts.
  • MUFG anticipates a 25bp rate cut in December, followed by three additional cuts in 2025, diverging from the market’s less aggressive pricing of rate reductions.
  • Longer-term skepticism surrounds Trump’s policies’ ability to sustain growth without fueling inflation, leading to concerns about declining real yields undermining the dollar later in the year.

• USD Outlook:

  • Early 2025: Renewed USD appreciation is expected, driven by tariffs and fiscal stimulus.
  • Mid-2025: MUFG foresees the dollar peaking in the first half of the year as the economy slows and Fed easing resumes, potentially leading to a retracement in the dollar rally.

Conclusion:

MUFG expects a flurry of trade tariff announcements and fiscal measures in January to propel the USD higher, with the rally likely peaking by mid-2025. Longer-term, the combination of economic slowdown and Fed rate cuts could dampen the dollar’s strength.