The U.S. dollar strengthens against the Euro and British pound as markets anticipate the return of President Trump.

• On Thursday, the British pound reached an eight-month low against the U.S. dollar, while the euro hit its weakest level since November 2022.
• The focus was on optimism about the U.S. economy and equities as markets resumed operations after disrupted trade during Christmas and the New Year.
• In recent months, the dollar has been strengthening due to expectations of lower taxes, deregulation under Donald Trump, and interest rate increases.

On Thursday, the euro and British pound reached their lowest levels in months against the U.S. dollar, coinciding with the start of the new trading year and the anticipation of Donald Trump's return to the White House in January.

The euro was 0.33% lower against the greenback at $1.032 shortly before 1 p.m. in London, hitting its weakest level since November 2022. Meanwhile, sterling dropped 0.78% to $1.242, an eight-month low.

The focus was on optimism around the U.S. economy and equities as markets reopened after disrupted trade over Christmas and the New Year. Wall Street stock futures were higher despite declines in Europe and the Asia-Pacific, with the dollar index ticking 0.25% higher.

As consumers and companies have disregarded the impact of high interest rates, the U.S. growth has surpassed expectations, with the unemployment rate remaining low, according to Susannah Streeter, head of money and markets at Hargreaves Lansdown, in a Thursday note.

"A second Trump presidency in 2025 promises lower taxes and deregulation, leading investors to hope for a goldilocks scenario."

While some growth is predicted for 2025, European forecasts remain pessimistic, especially due to Trump's threat of imposing tariffs and the possibility of a trade war.

Last week, revised figures indicated that the U.K. economy remained unchanged in the third quarter. However, economists caution that political instability and underlying problems will negatively affect Germany, France, and other euro zone countries in the coming year.

The recent outlooks have significantly impacted currency markets, with inflationary risks from Trump's tariff proposals expected to lead to fewer Federal Reserve interest rate cuts in 2025. Meanwhile, the European Central Bank and Bank of England appeared slightly more dovish at their December meetings. Higher interest rates are generally supportive of the domestic currency.

According to Mohamad Al-Saraf, FX and rates strategy associate at Danske Bank, the greenback is still receiving support from anticipations of USD-bullish Trump policies and a decrease in conviction about the Fed's rate-cut path for 2025.

The robustness of the U.S. macro narrative will be assessed using key data such as Thursday's jobless claims, Friday's ISM manufacturing report, and next week's non-farm payrolls, according to Al-Saraf.

Al-Saraf stated that the euro may return to U.S. dollar parity in the near future, as it last did in November 2022. However, he warned that market expectations for less than two quarter-point rate cuts this year could be too conservative and may lead to a dollar correction, along with any negative U.S. data surprises.