Bank of America Predicts a "Tale of Two Halves" for the US Dollar in 2025

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A new report from Bank of America (BofA) forecasts a divided performance for the US dollar (USD) in 2025, characterised by strength in the first half of the year, followed by a weakening trend in the second half.

The report suggests that the USD will likely remain robust during the first six months of 2025, primarily due to continued US economic growth and a moderate approach to easing by the Federal Reserve. However, the analysis indicates that the dollar is currently overvalued and that this bullish sentiment is widely held.

"Our G10 FX forecasts (ex-JPY & CHF) reflect this ultimate moderation in the USD occurring during H2, after trading close to current levels- on net- though mid-year," says Alex Cohen, FX Strategist at BofA.

The dollar's rally after the US election, which was driven by expectations of reflationary policies, is expected to wane as the new administration's policy agenda unfolds.

According to the report, the market may be underestimating the potential downside risks associated with these policies. Furthermore, the incoming administration's foreign exchange policy could shift, as they balance the benefits of a strong dollar with the advantages of the dollar’s reserve currency status.

BofA also notes that while overall USD positioning is long, hedge funds are particularly extended, and further dollar appreciation will depend on stronger participation from real money investors.

Quantitative signals and technical analysis suggest near-term upside for the USD, with a bullish breakout expected to continue.

A golden cross pattern on the DXY chart also indicates a potential buying opportunity for USD dips in December, with a projected rise by February. The report also anticipates increased USD volatility in 2025 due to potential tariffs and geopolitical factors.

GBP/USD investment bank consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/USD. Please request a copy here.

H2 USD Moderation

BofA's analysis projects that the USD will moderate in the second half of 2025, with a gradual depreciation.

This shift is expected as the market reassesses the impact of the election and the US economy slows. The bank's G10 FX forecasts suggest a depreciation in the second half of 2025, after trading near current levels through mid-year.

The report notes that while the US economy continues to outperform other G10 economies, disinflation is occurring more slowly than anticipated.

The market might also be underestimating potential downside risks to growth from the new administration's policies, including supply chain disruptions, reduced corporate profits, and retaliatory tariffs.

The USD rallied after the election, driven by expectations of reflationary and pro-cyclical policies from the new administration. This reaction is described as following a pattern similar to the 2016 election.

The market has been focusing on the potential upside risks to growth and inflation associated with the new administration's policies, but BofA thinks the USD's post-election support is likely to fade during the first year of the new administration, similar to what occurred in 2017.

The initial enthusiasm for the new administration's policies may diminish as their implementation unfolds.

BofA thinks the new administration may try to address the strength of the dollar through various measures, including influencing interest rates or intervening in the FX market, although direct intervention is less probable.

The USD enters 2025 at a stretched valuation, near historical peaks, with models suggesting it is overvalued relative to other G10 currencies.