The US dollar is poised for a significant shift, driven by a combination of domestic and foreign factors. Despite recent strengthening, experts predict a turning point is imminent 

In the near term, the dollar is expected to keep strengthening due to an unprecedented combination of domestic and international factors. One key driver is the looming return of Donald Trump to the White House and his trade policy agenda. Trump recently hinted on his social media platform, *Truth Social*, at plans to impose tariffs—25% on goods from Canada and Mexico and an additional 10% on Chinese imports. These policies could push American consumers to shift spending away from now-more-expensive foreign goods.  

With record-low unemployment and U.S. manufacturing struggling to ramp up production, the dollar will likely need to strengthen to redirect consumer spending back toward foreign imports, which are more readily available.  

Additionally, Trump’s tax policies from his first administration could be extended, with further tax cuts targeting areas like tips and social security payments, increasing U.S. household spending. This would likely exacerbate the existing demand for U.S.-made goods, requiring even more dollar appreciation to balance spending toward foreign supplies.  

Scott Bessent, the Treasury secretary designate, is known for his balanced budget outlook, and his team—comprising figures like Elon Musk and Vivek Ramaswamy—brings ambitious cost-cutting ideas to the table. However, history shows that reducing taxes is far easier than cutting spending, and investors appear to expect the budget deficit will widen. This investor sentiment is reflected in the dollar's current performance.  

Central banks, meanwhile, are unlikely to act to counter the dollar's rise. In fact, higher U.S. tariffs could lead to inflation by increasing import costs. Even if these tariff effects are temporary, the Federal Reserve has learned that consumers dislike sudden price hikes just as much as persistent inflation. This suggests that the Fed will respond more robustly to the next inflationary wave compared to its approach during 2021–2022, despite tensions with Trump and his Treasury leadership.  

Global Central Banks’ Perspectives: ECB and PBOC

The European Central Bank (ECB) and China’s People’s Bank of China (PBOC) are unlikely to resist a weaker currency. The European economy is struggling, and there’s limited political will to support it fiscally. This means that the euro at parity with the dollar is becoming increasingly likely.  

China’s government faces its own challenges, aiming to maintain Xi Jinping’s credibility by meeting or coming close to economic growth targets. However, Trump’s policies, which could extend beyond U.S.-China trade to include supply chains routed through countries like Malaysia or Vietnam, could further strain Chinese growth.  

While a sharp depreciation of the renminbi would hurt Chinese consumer confidence and risk American backlash, a more modest depreciation (around 10% against the dollar) could benefit Chinese exports by making them more competitive, aligning with Xi’s economic priorities.  

Medium-Term: Weakening Dollar Outlook

While the dollar may maintain its short-term strength, the medium-term outlook appears more uncertain. The dollar’s recent performance has largely depended on the U.S. economy’s outperformance compared to Europe and other regions. However, several factors could undermine this trajectory:  

1.Supply Shock from Tariffs: The proposed tariffs on imported goods would harm U.S. manufacturing by creating supply chain disruptions. This would weaken the U.S.’s economic edge.  
2. Higher Interest Rates: The Federal Reserve’s efforts to combat inflation by raising interest rates will likely deter investment.  
3. Reduction in Subsidies and Tax Credits: Biden-era initiatives like the Chips Act and the Inflation Reduction Act provided investment subsidies to spur growth. Scaling back these incentives would dampen U.S. economic activity.  
4. Economic Policy Uncertainty: Trump’s unpredictability adds a significant risk. Policy shifts and unclear strategies reduce investor confidence, which has historically proven to negatively impact investment.  

The Dollar’s Crossroads: Short-Term Strength vs. Long-Term Risks 

The short- and medium-term forces driving the dollar are in tension. While immediate market conditions and policy changes—like tariffs and tax cuts—could push the dollar higher, the longer-term outlook is less optimistic. Economic shocks, policy shifts, and investor caution could shift the trajectory over time.  

Ultimately, the key for investors and forecasters will be identifying the *turning point*—the moment when these short- and long-term trends align or diverge. The market remains uncertain about when this will happen, leaving the dollar’s future both fascinating and volatile.