Currency Outlook 2025: Dollar on a roll

The dollar index surged about 7 per cent in 2024 and has closed the year on a strong note. Indeed, the greenback gathered momentum in the last quarter ahead and after the US Presidential election. The index closed the year at 108.4.

Supporting factors

The outlook for the dollar is positive for 2025. The greenback can sustain the momentum that it had gained in the final quarter last year at least through the first half of 2025. Fear of a tariff war between the US and China especially can aid the dollar index to gain on the safe haven status. Concerns about high inflation on the back of the tariff war can also support the dollar.

Interest rates in the US can also be a supportive factor for the dollar this year. The US Federal Reserve in its last meeting in December has slashed its interest rate forecast for 2025. In its economic forecast released in December, the Fed had kept room for a total of 50-basis points rate cut this year. Earlier in September the central bank had a forecast for a total of 100-bps rate cut in 2025. The inflation outlook for 2025 was also revised higher by the Fed in its recent forecast. As such the interest rate in the US can continue to stay higher and may not come down at a faster pace as was expected earlier.

Dollar: More upside

The outlook for the dollar index (108.92) is bullish. The trend is up and is very strong. The index has surged over the last few weeks. There is room to test 110.50-111 in the short term. After that we can get a short-lived corrective fall to 109-108. However, the uptrend will continue to remain intact.

A fresh rise from around 108 can take the index breaking above 111. Such a break can take the dollar index up to 118-119 by the third quarter this year. A rise beyond 119 might be difficult as the rally would have become more stretched by that time. So, we expect the dollar index to find a top around 118-119. The index can reverse lower from around 119 and fall back to 114 eventually.

Yields: Sustain higher

The US 10Yr Treasury yield (4.57 per cent) has risen well above the 4 per cent mark last year. An immediate resistance is at 4.7 per cent which will need a close watch. A break above it can take the yield up to 5 per cent initially. A further break above 5 per cent can take the 10Yr Treasury yield up to 5.6 per cent and even higher this year. Such a rise in the yields will be very positive for the dollar index.

Strong support for the 10Yr Treasury yield is around 4 per cent. It has to fall below this support to avoid the rise to 5.6 per cent.

Euro: Move to parity

The outlook is bearish for the euro (EURUSD: 1.0308). The currency has declined below the crucial support level of 1.0450 recently. That has strengthened the downtrend. The chances are high for the euro now to move towards parity (1.00) against the dollar. Indeed it can go below parity and test 0.98 on the downside in the coming months.

From the big picture there is a danger of the currency declining below 0.98 as well. If that happens, the euro can tumble towards 0.95-0.93 this year.

Rupee: More weakness

The Indian rupee (USDINR: 85.78) was largely stable and was weakening at a very gradual pace until November last year. But the fall started to pick up pace after the US Presidential election outcome and gathered momentum to fall below 85 against the dollar following the US Fed meeting outcome in December.

The outlook is bearish for the rupee. Immediate resistances are at 85.45 and 85.15. Above these levels, resistances are at 84.70 and 84.20. The chances are high for the domestic currency to sustain below 85 going forward. The rupee can fall to 87.20 first and then 87.70-88 eventually in the coming months.

In a worst case scenario, if the rupee declines at a faster pace and breaks below 88, it can even see levels of 90 this year itself.