With few fiat alternatives, the US dollar remains strong despite huge imbalances in the US economy. Bitcoin and gold could be the only alternatives if US president-elect Trump and Elon Musk fail to deliver in 2025.
The US dollar ends 2024 on a high
The US dollar is set to end 2024 strongly, with the US dollar index nearing 2023 highs. If the greenback can surpass these highs, the next major levels of resistance are 2022’s high at 115 and 2001’s high at 120.
US dollar index on weekly chart with ROC, TradingView platform 9/12/24
The dollar’s strength is surprising considering the large twin deficits - a balance of payments deficit at 3.6% of US gross domestic product (GDP) and public debt of 6.2% of GDP - that have resurfaced with a vengeance. Trump wants to address these imbalances through trade tariffs and the so-called Department of Government Efficiency (DOGE).
Despite these deficits, the market has mostly “bought” the dollar’s strength; sentiment in favour of the greenback has soared, as has long positioning in the derivatives markets, signalling a possible massification of the position.
This optimism could stem from several sources, including the possible inflationary expectations tied to “Trumpnomics”, the interest rate differential and strong macroeconomic momentum.
No fiat alternative
However, perhaps the most important reason for the dollar’s strength is that there is no alternative currency, and it remains the world's major reserve currency for a variety of reasons:
- The euro is losing steam as an alternative, with political and economic instability erupting in the two nuclear countries (Germany and France).
- China's economy has yet to find its new economic model and solve its debt problems.
- Trump recently threatened the BRICS with tough sanctions if they create a new currency or support a currency to replace the US dollar.
2025: the year of the dollar or gold?
The dollar’s ability to sustain its uptrend in 2025 and push the dollar index to reach new highs depends on several factors, including:
- Confidence in - and results generated by - the DOGE's public spending control policies.
- Inflation generated by the Trump administration’s tax cuts and tariff policies.
- The Fed’s response to potential inflation spikes.
- The strength of other economies.
For now, there is market confidence. If Trump's economic policies are well-timed, the dollar’s strength could hold. However, if doubts arise, and deficits and imbalances remain unchecked, the market could look to non-fiat alternatives like gold and bitcoin.
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