Current environment favours U.S. dollar strength

The U.S. dollar is expected to maintain its strength through 2025, supported by a resilient American economy, hawkish Federal Reserve policy, and ongoing global uncertainty, says Michael Sager, managing director and CIO of multi-asset and currency management at CIBC Asset Management.

“The U.S. dollar has weakened off, actually, a little bit since the last month,” Sager said in a recent interview. “But if we look at the broad macro environment, it’s one that is still, we think, conducive to the U.S. dollar remaining broadly strong.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Despite the slight pullback, Sager said several factors continue to underpin dollar strength. 

“The U.S. economy is still the strongest major economy in terms of growth,” he said. “The Federal Reserve has become more hawkish in terms of its interest rate policy outlook, compared to other central banks including the Bank of Canada.”

Plus, he said, anytime there is “a period of high uncertainty, high market stress, that’s typically conducive for U.S. dollar strength.”. 

Taken together, the combination of economic outperformance, aggressive monetary policy, and geopolitical tensions suggests a “stronger-for-longer” dollar. 

“The scene is set for the dollar to remain relatively strong and certainly to continue to trade far above a level that we would think is its long-term fair value,” he said.

For the Canadian dollar, the news over the past month has been about tariffs.

“At the beginning of February, the Trump administration announced much more Draconian tariffs than we and the market had expected,” Sager said. “It looks like the best assumption going forward is that there will be some additional tariffs on the Canadian economy.” 

The potential for further trade restrictions adds to existing headwinds for the loonie.

“At the margin, that will be negative for the Canadian dollar,” Sager said. “That will likely lead the Bank of Canada to ease its monetary policy a little more than it would have done.”

Sager said he expects the Canadian dollar to remain weak throughout the year. 

“It will continue to trade below a level which we would associate with its fair value — and quite meaningfully below that level, perhaps 15% cheap to that fair value,” he said. 

Global currencies are also feeling the effects. For the euro, Sager noted several downside risks. 

“The European economy has remained weak. The European Central Bank is cutting interest rates. Domestic European politics remain confused and difficult,” he said. 

In addition, he said competition from China — particularly in the electric vehicle sector — and weak Chinese demand for European exports are also weighing on the euro.

Tariff risks only add more uncertainty to the outlook.

“We had expected some targeted tariffs focused on the European auto sector. The risk is that tariffs are more extensive. This will be negative for the euro,” Sager said. 

Conversely, Sager said he holds a constructive view on the Japanese yen, which is traditionally seen as a safe-haven currency. Japan’s economic recovery and improving inflation dynamics also support the currency. 

“The Japanese economy finally, after three-and-a-half decades, seems to be achieving a self-sustaining recovery,” he said.

Emerging market currencies present a more nuanced picture. He said currencies from countries with strong economic fundamentals and high interest rates, like Brazil, Colombia, and South Africa, are appealing. However, global uncertainty remains a headwind. 

“EM assets broadly — whether it’s FX, bonds, equities — do not do well or as well as fundamentals would argue in periods of heightened uncertainty,” he said. 

Investors seeking to navigate today’s complex environment should focus on long-term fundamentals, he said. 

“There are always reasons to have nervousness and fear,” he said. “Stick with the long-term, stick with fundamentals, and a well-diversified portfolio. That would be my strong recommendation.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.