The greenback is closing in on the European common currency. It recently hit a high of 1.0179 dollars to one euro, but has since eased back, so is 4 cents from parity. The majority of market participants are expecting this to be achieved soon. Some even assume that this will not be the end of the US currency's appreciation, but that it will go below parity; in other words, less than one dollar will have to be spent to get one euro on the currency markets.

A large part of these dollar gains have been recorded since September. At the end of the third quarter, the euro was still at 1.12 dollars. Since then, the euro has weakened. The dollar strengthened as it became increasingly clear that Donald Trump was ahead in the race for the White House. With Trump's victory in the US Presidential election, the dollar rally really picked up speed. On 5 November, the day of the election, the euro was still trading at 1.09 dollars. Since then, the euro has almost consistently underperformed the greenback. Compared to its high at the end of September, the dollar has appreciated by around 9% against the euro. The dollar index, which measures the performance of the US currency against six major trading currencies, has appreciated by up to almost 10%, its highest level for more than two years.

Investors have been preparing their portfolios for some time for the trade and customs policies that are likely to be implemented under Trump in his second term of office. Of course, it should be noted that Trump's announcements are also subject to a certain volatility of their own, to put it mildly. Not everything always turns out the way he announces it; there are also quick backtracks, more moderate tones, or sometimes a sharpening of the rhetoric. There is therefore also an element of uncertainty: how high will the tariffs be, how broadly will they be applied across the economy and products, and which countries will they ultimately be levied against? That is not yet clear, and market participants will have to wait and see.

And it is precisely this uncertainty that continues to drive the dollar on the currency markets. At a certain point, a sustained rally usually also attracts bears who are betting on a setback. However, they are holding back very strongly. Many in the market are positioned long for the dollar and few want to give up their bullish bets for the greenback at the moment, which means it is not considered wise to provoke the rising dollar with shorts. The expectation that Trump will ultimately come up with tariffs is simply too great. This is familiar from his first term in office, when he imposed tariffs on several countries, including Mexico and China. The dollar appreciated by around 13% between the beginning of 2018 and the beginning of 2020. As an investor, you don't want to be on the wrong side of the market. The dollar therefore still has room to rise, so a dip below parity cannot be ruled out at all.

Trump's expected protectionist policies will be associated with some inflationary pressure. And it is precisely this that is likely to prompt the Fed to be more sparing with interest rate cuts over the course of the year. Some are even anticipating that a discussion about raising interest rates could arise in the event of a stronger acceleration in inflation.

The dollar is also receiving a tailwind from the domestic bond market, where the yield curve is steepening again. As long as government bond yields in the US are higher than in other countries, dollar investments are more attractive. This attracts capital to the US, which is associated with demand for dollars. In addition, the ECB will remain in rate-cutting mode due to the expected weak growth in the eurozone. This weakens the euro and is therefore also positive for the dollar.