The Xe Global Currency Outlook - January 2025

The Global FX Market in 2025: Key Insights and Risks

As we move into 2025, the USD has been on a steady climb, showing notable strength since late September. A combination of a solid U.S. economy and diminishing expectations of significant Federal Reserve interest rate cuts has bolstered the dollar’s position in global markets. But what does this mean for key currencies and global FX trends? Let’s dive in.

What’s driving USD strength?

The U.S. economy continues to expand at a robust pace, leaving the USD well-supported. Market analysts predict the dollar will maintain its strength, particularly as we move into January.

Adding to the mix is the upcoming U.S. Presidential inauguration on January 21, which is expected to usher in new economic policies, including potential tariff increases. This period will likely see a spike in FX volatility, particularly for currencies with significant trade exposure to the U.S.

Currencies to watch

While the USD flexes its muscles, several currencies face headwinds:

1. EUR, GBP, and CNY:

   These currencies are particularly vulnerable to U.S. tariff hikes due to their reliance on exports to the U.S. The Eurozone, in particular, could face a double hit as the European Central Bank (ECB) considers deeper rate cuts, exacerbating the Euro’s weakness.
   

2. AUD and NZD:

   With global economic activity expected to slow in the first half of 2025, these currencies could see downward pressure. Both economies are sensitive to shifts in global trade and commodity demand.
   

3. CAD:

   The Canadian dollar has slipped to a five-year low, driven by a weaker domestic economy and its export dependence on the U.S. However, there’s a silver lining: as Canada’s economy slowly recovers, the CAD may have already absorbed the worst of its depreciation.

Major risks ahead

As 2025 unfolds, several risks loom over the FX landscape:

• USD strengthening further:

  The dollar could gain another 5.9% in the first half of 2025, reaching levels last seen in September 2022. Key drivers include stronger U.S. economic performance, rising inflation due to tariff hikes, and a pause in the Fed’s rate-cutting cycle.
  

• EUR/USD below parity:

  The Euro faces significant challenges, including restrictive trade practices and deep ECB rate cuts. These factors could push EUR/USD below parity, highlighting the Eurozone’s struggle with slower growth.
  

• GBP/USD under pressure:

  The pound could dip below 1.2000 as the U.K. economy grapples with sluggish growth and heightened USD strength.
  

• AUD/USD and NZD/USD declines:

  Both currencies could see significant declines (below 0.6000 and 0.5472, respectively) as global trade tensions weigh on economic activity.
  

• USD/JPY volatility:

  The yen’s trajectory will likely remain turbulent. While higher Bank of Japan (BoJ) interest rates could boost the yen, stronger U.S. treasury yields might offset these gains.

What to expect moving forward

The global FX market in 2025 promises to be dynamic, shaped by evolving trade policies, central bank actions, and economic shifts. For those navigating this space—whether currency experts or curious observers—staying informed will be key to understanding these fluctuations.

With the U.S. dollar holding strong and various currencies adjusting to global economic pressures, the coming months are set to bring a mix of challenges and opportunities in the FX market. Stay tuned as we continue to monitor these developments.

The content within this blog post is not intended for use as financial advice. This content is for informational purposes only.