As economic storm clouds gather on the horizon, the U.S. economy faces a precarious balancing act between a surging dollar and looming recession threats. The numbers don’t lie. GDP growth is projected to slow to a measly 2.2% in 2025 and an even more anemic 1.3% in 2026. Betting markets aren’t exactly optimistic either, putting the odds of a 2025 recession at a concerning 43%.
The job market? Not great. Job openings have contracted by a whopping 40% over 2.5 years. Continuing unemployment claims are creeping toward 2 million. Consumers are tightening their belts, and confidence is in the toilet. Meanwhile, major corporations like Delta, United Airlines, Dollar General, and Target are sounding the alarm bells.
Here’s the weird part: the dollar is thriving despite this gloomy backdrop. It rose 7% in 2024 even after two Fed rate cuts. The greenback now sits two standard deviations above its 50-year average. Ridiculous strength.
Why so strong? The U.S. economy, despite its issues, is still outpacing other developed markets with 2.7% growth in 2024. The gap between U.S. and foreign bond yields hasn’t been this wide since 1994. Markets are betting on limited Fed cuts compared to the ECB in 2025. The U.S. real broad effective exchange rate is currently near all-time highs. America simply looks better than the alternatives. Less ugly in the ugly contest, if you will.
Trump’s policies add another layer of complexity. He wants a weaker dollar to boost exports, but his proposed tariffs would likely strengthen it against trading partners’ currencies. Economic vitality balance has historically influenced dollar strength. Classic contradiction. His extension of tax cuts and potential corporate rate reduction to 15% for domestic producers would boost the economy but potentially worsen the trade deficit.
The global implications aren’t pretty. A strong dollar tends to stifle global trade growth, restricts developing countries’ access to capital, and makes inflation control a nightmare for countries with weakening currencies. Financial dislocation is a real possibility if the dollar becomes too expensive.
This balancing act won’t be easy to maintain.
