Trade-weighted index

The strength of the US dollar is influenced by various factors, including the composition of trading partners, GDP growth, inflation, interest rates, capital flows and trade policies. The composition of trading partners is generally impacted by the volume of trade between the US and other countries, with substantial weight given to the Euro area, China, Canada, Mexico and Japan. Together, these regions account for more than two-third of the TWI weight, and any weight changes may impact the TWI. Real GDP growth in the US as compared to real GDP growth in other countries also impact the strength of the US dollar as investors tend to move their capital toward fast-growing markets, prompting higher demand for the US dollar. Furthermore, robust economic growth often prompts the Federal Reserve to increase the interest rates, increasing investor's return on bond investments. Finally, trade policies, such as tariffs and trade agreements impact the currency via market expectations for global economic uncertainty and changes in economic growth as a result of trade policies.

The trade-weighted index has been growing for over a decade, driven by the United States' robust economic performance, strategic monetary policies and the dollar's enduring global safe-haven status. Sustained economic resilience, characterized by strong GDP growth, technological innovation and attractive investment environments, has consistently supported dollar strength. The Federal Reserve's measured approach to interest rates, combined with the relative economic stability of the United States compared to other developed economies, has further bolstered the dollar's global position. Geopolitical uncertainties and complex international trade dynamics have additionally reinforced the dollar's attractiveness, making it a preferred currency for international transactions and financial investments.

Following the recent US elections, projections for the TWI in 2025 have shifted. Previously, a gradual decline was anticipated due to moderating growth and lower interest rates. However, the election outcome, with President Trump's return, suggests the dollar may remain strong due to expected tax cuts, deregulation and trade policies likely to support US growth. Nonetheless, there is substantial uncertainty regarding policy implementation and its effects, introducing potential volatility. While current economic indicators favor USD strength, structural imbalances, potential trade tensions, and fiscal sustainability concerns could pose challenges to the currency's long-term trajectory.