Forex is a special place. In winter, bears hibernate. In the international currency market, the “bears” for the US dollar, on the contrary, come out of their dens. Standard Bank warns of a triple blow for the greenback in the form of a change in the Fed chairman, the abolition of tariffs by the Supreme Court and the tightening of monetary policy by the Bank of Japan. Deutsche Bank adds to this a seasonally weak December for the US currency and predicts a 2% decline in the USD index before the end of 2025.
Despite the fact that Donald Trump announced that he would name a new Fed chairman only at the beginning of the year, and not at Christmas, the choice seems to have already been made. Vice President DJ Vance canceled interviews with the three most likely candidates – Christopher Waller, Kevin Warsh and Kevin Hassett. The betting markets are convinced that the last one will become the head of the central bank.
Can the new “dove” in the FOMC accelerate the process of easing monetary policy, as the owner of the White House wants? It is unlikely that there would be a single Committee. However, the split is now greater than ever. Donald Trump uses the principle of “divide and rule”, the markets believe him and set expectations for a reduction in the federal funds rate to less than 3%. This forecast is issued by officials who advocate aggressive monetary expansion.
The cancellation of tariffs by the Supreme Court, according to BNP Paribas, will be negative for the US dollar. Eliminating an important source of budget replenishment will give rise to talk about the sustainability of the deficit. Investors will demand a higher premium for the risk of owning assets denominated in US currency. Capital outflow will drop the USD index. The White House will be able to smooth out the situation by replacing universal import duties with other fees. However, this will take time.
BNP Paribas continues to believe in the strength of the upward trend in the EURUSD due to the narrowing of the economic growth differential between the United States and the eurozone. However, the bank lowered its forecast for the euro from $1.22 to $1.2, citing the greater resilience of the United States.
Indeed, the OECD has raised its estimate of US GDP for 2025 from 1.8% to 2% and for 2026 from 1.5% to 1.7%. The main reason is the increased boom in investments in artificial intelligence technologies. The forecast for the eurozone was also raised by 0.2 percentage points to 1.2% next year. It seems that there will be no reduction in the divergence in economic growth. This makes the EURUSD rally potential limited.
