King Dollar's Trump Rally: What Does it Mean for Macro?

U.S. Dollar, EUR/USD, SPX Talking Points:

• It’s been a bullish backdrop for the USD since the Q4 open as the USD just finished its strongest quarterly outing in nine years. The quarter opened with a bullish reversal, but the election of Donald Trump in November drove a strong move into the USD that’s lasted through the 2025 open.
• As I said in the aftermath of the election, USD strength and U.S. equity strength at the same time are certainly possible, but it seemed unlikely as a long-term theme as a continued gains in the U.S. Dollar brought risk to U.S. economic performance, which could hinder gains in stocks.
• The last time that the USD showed similar strength was in 2022, as the Fed was hiking rates to stem inflation, and that episode came along with a brutal backdrop for equities.
• To get our full 2025 Forecast for U.S. Equity Indices, the link below will allow for access:

Indices AD

The U.S. Dollar gained more than 7.6% in Q4 of 2024, which would be the highest quarterly gain for the currency since 2015. And for some additional scope, this would be the third highest quarterly jump for DXY in more than 30 years. There was a similar move in 2022 when DXY added 7.1% in Q3 of that year, but this was followed shortly after by a strong reversal that then led to two years of ranging price behavior before the currency ultimately broke out last November.

U.S. Dollar Quarterly Chart Since 1979

U.S. Dollar Strength – What’s Behind the Move?

With DXY it’s important to remember that it’s a basket of underlying currencies. I had looked at this in the article, USD: Behind the U.S. Dollar, the Global Reserve Currency. A simple way of thinking of it is that because currencies are the base of the financial system, the only way to value a currency – is with another currency. And with USD as the reserve currency, which is also the measuring stick with which most other currencies are evaluated in their major pairs, like EUR/USD or AUD/USD, the only way to derive a value for the U.S. Dollar is by using an amalgamation of underlying currencies.

For DXY, the most common yard stick of the U.S. Dollar, that basket was originally created in 1973 and, at the time, the world was a far different place. There was no Euro as there were numerous independent currencies in use across the European bloc. China was a much smaller economic consideration, so there was no allocation in the DXY basket at the time, and even Japan was still in growth mode, only taking on a 13.6% allocation into the DXY which, to date, stands as the sole application of Asian currencies in the index.

When the Euro came into inception in 1999, the underlying European currencies were conglomerated into one massive Euro allocation, which now makes up 57.6% of the basket. And as such, the U.S. Dollar or at least the DXY market, is often seen as somewhat of a mirror image of the Euro.

So, when we see a rapidly increasing value of the U.S. Dollar, that means that we’re probably also seeing other currencies that make up the basket, with a heavy weighting towards the Euro, showing considerable weakness. And this isn’t necessarily a ‘good thing’ for U.S. economic output, such as we saw in 2022.

The full breakdown of the DXY basket is below:

Taken from Intercontinental Exchange, U.S. Dollar Index Contracts FAQ

SPX: The Strains of a Strong Dollar

A strong U.S. Dollar can help to temper inflation in the United States. But given the far-reaching impact of a globalized economy, it can also serve to boost inflation elsewhere, such as we saw in 2022. And the logic for such a relationship is rather simple and we can take an example from Apple. Let’s say that Apple is producing and selling laptop computers in the United States for $1,200 per unit, and they have a 10% net margin which would mean $120 profit for each computer sold, and $1,080 cost.

Now let’s assume that the Euro is valued at 1.2000 at the time, and Apple prices their laptop accordingly and sells each for €1,000, which would mean $1,200 in USD at the 1.2000 exchange rate.

Now, let’s assume that EUR/USD drops dramatically, as it did in 2022 and again in Q4 of last year. When or if the EUR/USD pair hits the parity level, Apple now has a problem on their hands. If they’re selling laptops at €1,000 per unit and the exchange rate is an even one-to-one, well now they’re losing money on ever unit sold in Europe. Gone is the $120 profit per unit, and they’re now bringing back $80 less than the cost of goods sold for each unit.

EUR/USD Weekly Chart

What is Apple going to do, are they going to continue to lose money on every laptop sold? Probably not. Instead, they can look to increase prices in Europe and there we have an initial driving force for inflation. But the macroeconomic effect of a stronger Dollar and a weaker Euro are less competitiveness for U.S. products given the stronger currency (which can lead to less inflation and growth), and higher inflation for Europe as prices on imports have increased to account for the weaker domestic currency.

Other laptop manufacturers notice the higher price of Apple laptops, and they too want to get in on the action, as they can now raise prices; perhaps not as much as Apple, but they can pad their margins while remaining competitive.

This is why, ideally, currencies will exhibit a form of stability; so that the Apples of the world can focus on their mission of creating technology products and not ‘playing’ the currency market. And as a case-in-point, the S&P 500 index posted its best two-year incline in 2023 and 2024 since the 1997-1998 episode, as the U.S. Dollar and EUR/USD were range-bound for much of the past two years.

I discuss that in-depth in the Equity Indices Forecast for 2025, which you can access from the link below.

Indices AD

U.S. Dollar Monthly Chart

USD Breakdown Scenario – EUR/USD

So far, the Greenback has held strength through early-2025 trade. And going along with that has been a weak Euro and a EUR/USD pair that has just tested a major level at the 1.0200 handle.

If we are to see a pullback in the USD, this could help EUR/USD to recover, and at this point, the pair has just tested the 23.6% Fibonacci retracement of the same major move that marked the high in 2023 at the 61.8% level, and the low from the first-half of last year (which then became resistance in December).

This was a big support test in EUR/USD and, so far, it’s held the low in the pair. For resistance, it's the 1.0500-1.0611 zone that sticks out, with the latter price serving as the 38.2% Fibonacci retracement of that same major move.

EUR/USD Weekly Price Chart

USD Breakdown Scenario - Stocks

That move of continued USD-strength has also come along with a pullback in U.S. equities, and the first support zone looked at in the forecast has come into play on SPX. This was the election gap, and as of this writing, it’s helping to mark the 2025 low for the index.

What would likely be needed for this scenario to continue to play out is soft U.S. inflation data, which could further push for rate cut potential from the Fed in the middle of this year. That backdrop could both support lower U.S. Treasury rates and a softer stance from the Fed, both of which could be a positive driver for U.S. equities.

At this point, the 6k level in SPX remains a major spot on the chart. It was resistance after the election and while there was some pricing above that level, it was relatively brief. In my opinion, buyers still haven’t exhibited control above that major psychological level, and that would be a key point of emphasis from a price action perspective to allow for longer-term bullish continuation scenarios. if that can happen, then it's the 6100 level that looms above that, which, as of this writing, has helped to mark the all-time-high in the index. Beyond that, the SPX would be working with fresh all-time-highs and the door would be open for continuation in that breakout scenario. 

SPX Daily Price Chart

USD Strength Scenario – DXY

I don’t want to imply perfect correlation between the U.S. Dollar and stocks, or even U.S. Treasury rates, because the fact of the matter is that it’s possible for equities and USD or equities and U.S. rates to both move-higher alongside each other. And to be sure, any look at correlation coefficients between those markets will show oscillating values; and the reason for that is ‘things change.’ The DXY, in particular, is a complicated variable given what I shared above – it’s a composite.

But as I said in the aftermath of the election, it seemed unlikely that both USD and equities would be able to continue strong bullish trends throughout 2025 trade. And the reason for that goes right back to what I shared earlier in this article, where a globalized economy seems unfit to allow for such extremes in those markets at the same time.

And given the reaction that we’ve seen over the past month, with both rates and the USD moving higher, as stocks staged a pullback, we’re at a juncture where it seems unlikely for the USD, U.S. Treasury rates and stock prices to continue staging an incline.

At this point from the daily chart the U.S. Dollar retains a bullish bias given the holds of higher-highs and higher-low. If that remains, this could be a hindrance for equity gains, and this is what highlights the resistance scenario for SPX around 6,000 or 6,100, both levels that have given bulls trouble, so far.

Continued strength in the USD would also expose EUR/USD to downside continuation potential, with the 1.0200 level the next major spot on the chart for bears to challenge, after which the parity level at 1.0000 would come into play.

From the DXY weekly chart, it’s the 106.61 level that seems important. This is a long-term Fibonacci level and it helped to hold the highs in 2023 as the range continued. This is the level that I would like to see bears break-below to illustrate a continuation of range-bound behavior, and that’s what I think would be a necessary component to allow for SPX to post a sustainable 2025 rally to fresh all-time-highs.

U.S. Dollar Weekly Price Chart

--- written by James Stanley, Senior Strategist