USD is a world reserve currency and knowing its whereabouts is important for almost all countries in the world. In recent years we have seen its value fluctuate caused mainly by interest rate hikes, inflation, and economic uncertainty.
Global crises like wars also affect its rates significantly. For 2025, key factors that will impact the USD include the FED’s policy stance on inflation, employment trends, and international markets. Let’s analyze the main factors influencing USD rates in 2025 and define what we can expect for the next year.
Macroeconomic factors that affect Dollar rates
Macroeconomics influences any country’s currency rates, which are closely watched by both investors and traders. The difference between bid and ask prices widens during uncertainty, making it difficult to invest or trade cheaply. Knowing these factors and their influence on the Bid and Ask prices of the USD can mean the difference between making profits and losses.
Key factors include inflation rates, consumer price index (CPI), employment data, and the Fed’s monetary policies. The U.S. inflation rates were high in recent years and the Fed took an aggressive stance, increasing interest rates. This effectively made the dollar appreciate against other currencies. Whenever inflation remains around 2% which is the Fed’s target, there won’t be an aggressive reaction from the Fed.
Employment data such as Non-farm payroll and other employment statistics heavily impact the dollar value as well. The Fed’s monetary policies such as interest rate decisions and balance sheet strategies can define where the USD will go in 2025, up or down. If the Fed cuts rates in 2025 the value of the USD will most likely fall, while the opposite will happen if the Fed increases interest rates.
International trade and geopolitical influences
The U.S. trade deficit with China and the EU could sway dollar rates in 2025. Generally, a large trade deficit weakens the dollar and a balanced surplus trade environment strengthens it. Any shifts in tariffs or trade agreements will heavily impact the USD demand as well.
China has shown rapid economic growth, and yuan internationalization efforts might shift some global reserves away from the dollar. Countries that are in opposition to the USA might find their reserve currency in the Chinese Yuan. If China’s economy remains strong in 2025 the influence of the yuan could grow even in the influence that will inevitably challenge the dollar’s dominance in Asia and other regions where these countries reside.
Geopolitical tensions
There are many crises right now in the world, including Russia’s aggression against Ukraine and Israel’s efforts against terrorism and Iran, which will seriously impact the global economy and the dollar as a world reserve currency. If the war in Ukraine ends in 2025, we might see a bullish dollar as a result of growing demand for the currency.
US fiscal policies and national debt
If government spending remains high, it can lead to higher inflation and affect the dollar's strength in 2025. Persistent inflation and fiscal deficits typically require more borrowing from the government and impact both inflation and bond yields, which directly influences the strength of the U.S. dollar. As national debt rises, Treasury yields usually follow, and higher yields support dollar demand. This is because investors view U.S. bonds as stable. However, excessive debts can influence the markets negatively and create risks to dollar stability in the long run.
The dollar as a safe-haven
The dollar also benefits from safe-haven demand from investors during economic uncertainties and global crises. For 2025, the global crises can strengthen the dollar, as USD is much proffered by investors worldwide. The growing interest in alternative assets such as gold and cryptos will also reduce demand for the dollar. Investor sentiment is typically in favor of these assets during times of instability. Gold is seen as a safe-haven asset to hedge against currency risks and its price is negatively correlated with the dollar.
Emerging technologies
The development of CBDCs (Central Bank Digital Currencies) by major economies, such as China, may also challenge the dollar's global role. This is likely if CBDCs prove efficient in cross-border transactions. CBDCs are actively developed in the US as well, and the shift towards digital central currencies will not happen without an impact on USD.
