ROI-Is that it? The great dollar reversal fizzles: Mike Dolan

By Mike Dolan

LONDON, Jan 15 (Reuters) - Rolling back the dollar's near 50% rise over the past 15 years was a pillar of Donald Trump's economic agenda. Now that early success has fizzled, markets suspect last year's 7% drop may be it.

As the U.S. president heads to the World Economic Forum in Davos next week and celebrates the anniversary of his second inauguration, the mood around the greenback seems to have turned - even among some of last year's biggest bears.

The reasons are relatively straightforward. Fears early last year of foreign capital flight from U.S. markets amid trade, economic policy and geopolitical upheavals never really materialized. A wave of currency hedging also faded. U.S. growth actually accelerated and the dollar's interest rate premium held up for the most part.

And even Trump's renewed campaign over Federal Reserve independence early this year has had little major exchange rate fallout - largely because it has not shifted market assumptions about the Fed's long-term policy path.

The upshot was that after its worst first half of any year in the floating exchange rate era, the dollar's index against the major currencies .DXY found its footing by midyear and rebounded about 2% from the lows.

Measured more comprehensively to account for broad U.S. trade exposure and inflation dynamics, the dollar's real effective exchange rate index gave back just 7% of the 47% gains clocked between 2011 and the end of 2024.

The relentless dollar gains of the past decade were largely driven by a long period of U.S. economic and stock market outperformance against most other rich-world economies. That advantage is proving hard to shake, even in the face of Trump's disruptive domestic and global policy approach.

U.S. GDP ended the year growing at an annualized rate of more than 4%, and upgraded World Bank forecasts for 2026 now put U.S. growth at 2.2% - more than twice the pace expected for the euro zone or Japan.

S&P 500 .SPX earnings growth forecasts for next year are now above 15%, about four percentage points faster than the equivalent for the euro zone STOXX 600 .STOXX.

With that U.S. edge back, consensus dollar forecasts have flattened. A Reuters poll this month put the median one-year euro/dollar forecast at 1.20, implying only about 3% further dollar weakness from here.

EXCESS AND INCONSISTENCIES

Societe Generale's currency strategist Kit Juckes reckons the only plausible way back to a dollar-negative environment is if U.S. equity indices suffer a significant correction and put the brakes on growth.

That concern, prevalent for much of last year, now looks distant as the new year kicks off.

Deutsche Bank's George Saravelos, one of the most high‑profile dollar bears in 2025, also thinks the tone has shifted. While he remains negative on the dollar longer term, citing the loss of some of its exceptional economic edge and interest rate protection, Saravelos reckons another move lower now requires a new catalyst.

"Our dollar conviction is lower than last year," he told clients this week.

The picture has been mixed on several fronts in January, with fresh yen weakness on snap election bets in Tokyo contrasting with a Chinese yuan surge to its strongest in almost three years as the country's trade surplus zooms to new records.

"For dollar weakness to broaden out to the rest of Asia and beyond, the relentless recycling of excess savings into the U.S. needs to show greater signs of turning," Saravelos wrote.

NEW PLAZA?

So, is that it? Is time up for the great dollar unwind that many of the Trump team felt would result from a protectionist trade war and political pressure on the Fed?

One of the Trump team's core economic narratives is that years of widening U.S. trade deficits were driven by unfair overseas trade practices, and that the resulting build‑up of foreign savings was simply recycled back into U.S. markets.

That recycling, the argument goes, merely enriched Wall Street and the wealthiest asset owners, while crippling domestic industry and jobs by keeping the dollar overvalued and pricing U.S. manufacturers out of foreign markets.

Many argue this has left a dangerous and unstable legacy, pointing to record U.S. liabilities to foreign investors, reflected in a ballooning net international investment deficit of around 90% of U.S. GDP.

The U.S. tariff push and resulting dollar swoon last spring appeared to be working to plan in that regard, with lagging U.S. asset markets the main casualty, alongside a rise in business uncertainty.

But the full gamut of Trump policies - from fiscal stimulus and deregulation to riding an already unfolding artificial intelligence boom - has reignited U.S. growth and lifted Wall Street stocks, only to stanch the dollar bleed in the process.

The net investment position barely shifted.

What strategists now wonder is whether the entire policy menu can be consistent and whether dollar depreciation simply stalls if U.S. growth and stock markets reheat.

"Trump did get the dollar down - the problem is that if he wants the world's strongest economy, he may not be able to keep it down," said SocGen's Juckes.

Juckes thinks the situation may ultimately require another U.S.-led international agreement akin to the Plaza Accord of the 1980s to actively manage the dollar lower – even if that's hard to imagine in the current, tense and geopolitically fractured world.

"The current configuration of all the world's capital going to the United States and the dollar being so strong ... takes us to an unbalanced global market," Juckes added. "I just don't think it's healthy to have all the world's excess saving going to the United States, with such big net investment imbalances."

"The market is not solving that problem smoothly."

The opinions expressed here are those of the author, a columnist for Reuters

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