The dollar’s rise could be the next shock to markets

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The bet against the dollar is showing early signs of turning, leading to another curve forming in global markets for 2025.

This year, one of the most notable reactions to the chaos unleashed by the world has been the swoon of the US currency Donald TrumpGlobal trade tariffs. Instead of rising, as the dollar usually does in times of stress, it fell strongly, continuing the declines that began earlier in his second term. This is what happened in the first half of 2025 Worst start What year for currency for more than half a century, which is a great admiration from global markets to the president’s adventures in geopolitics and global trade.

This confusion sparked a historic torrent of currency trading. It so happened that the Bank for International Settlements conducted its triennial foreign exchange market analysis in April, during the most violent part of the storm. Last month, the Bank for International Settlements revealed that average Nearly $10 trillion Hands changed hands in the currency markets every day during that period – an increase of about a third compared to the same month three years ago.

This stampede for the dollar was important at the time, and it remains important today. It was a warning sign that the currency’s status as a safety valve for the financial system is under pressure and a reflection of an unprecedented willingness among stock and bond investors to grapple with the issue. Armor themselves of risk in what is supposed to be one of the least risky currencies on earth.

But since late April, the dollar has been at its best. If anything, it has turned higher over the past month. The DXY dollar index, which measures its value against a basket of other currencies, has achieved modest gains of 3 percent since early September. Now, analysts and investors are cautiously wondering whether the lows are behind us.

Steve Englander, head of currency research at Standard Chartered, has been raising this issue in an analysis that he says is “astonishing”.

“We see a path through which the exceptionalism of the dollar can be maintained through rapid growth in productivity and profits, and consequent strong capital flows,” he wrote in a note to clients.

“We see exciting, but tentative, evidence that the trend in productivity growth is on the rise,” he added. If this continues, it “could be a precursor to a sudden rebound in the dollar.” If he’s right, a lot of investors will have a lot of catching up to do.

Deep analysis of productivity growth is one thing, but another underrated factor here is the dirtiest dynamics in currency trading. The United States, and by extension the dollar, certainly has its problems. But other currencies are not a blatant buy at this point, which makes the dollar look like a good fit.

The Japanese Yen has taken a big hit since the selection of new Prime Minister-in-waiting Sanae Takaishi. Analysts at Deutsche Bank indicated about three weeks ago that they were positive on the yen, but in recent days they said they were now starting to exit. “Sanae Takaishi’s surprise win reintroduces a lot of uncertainty about Japan’s policy priorities and the timing of the Bank of Japan’s interest rate hike cycle,” they said.

In Europe, on the other hand, the political circus continues in France, and although the country’s government bonds are not hurting government bonds too badly (investors know full well that the ECB can put out any serious fires), the whole thing has hit French stocks and put an end to what has been a great rally for the euro this year. Sterling can do little more than tread water ahead of next month’s budget – a high-risk event that, if all goes well, will serve as a nap for the markets.

In a note this week, Goldman Sachs noted that its measure of speculative flows into the dollar — often a bellwether for other types of trades — has shown a noticeably more positive tone recently. The bank said a “significant increase in bullish dollar positions” helped push the currency to its highest level in two months, driven in particular by speculators’ aversion to the yen and euro.

The economic picture is also important here, especially with regard to the creeping suspicion that tariff-induced inflation is not dead but dormant. If it rears its ugly head towards the end of this year and the beginning of next, it will become very difficult even for the heavily Trump-influenced Federal Reserve to deliver the large series of interest rate cuts that market participants have been anticipating.

All things being equal, this sets the scene for the dollar to at least remain steady, and possibly rise.

As investors know well, predicting the course of currencies is a fool’s errand. The wide range of variables on each side of every trade makes this an extremely difficult task, and accuracy is often the result of dumb luck. A persistently deteriorating US jobs market would go a long way in limiting any upside.

Currently, the US currency is still 9 percent weaker than it was at the beginning of this year. If it remains at this level through the end of the year, it will be the largest annual decline since 2017. But if this autumn improvement gains momentum, it could spark a scramble to reset portfolios and produce a very rapid rally.

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