With the Trump administration’s changes in trade and financial policies looming, the U.S. dollar is sensitive to headline risks and will be subject to volatility in the coming months. And that volatility injects an uncertainty tax that distorts the efficient functioning of financial markets and the economy.
While our outlook on the dollar remains bullish until tariff policy is clarified, there is a downside risk in the near term.
Read RSM’s global economic outlook for 2025 in the latest issue of The Real Economy.
A look at the dollar-euro one-month at-the-money implied volatility—a metric of expected volatility in the dollar-euro currency pair now until maturity—suggests that there is ample room for dollar weakness and volatility until the Trump administration’s tariff policies are resolved.
A look at the similar metric over three months reveals a similar risk for investors who are holding long dollar positions or need to engage in contract decisions over that time horizon.
Future volatility is the single undeterminable variable in the Black Scholes option pricing model. Investors and firm managers that have exposure to currencies like the euro, loonie, peso and rupee will have to consider such volatility until there is more clarity on trade policy.
That clarity will not come until President Trump’s self-appointed date of Feb. 1 for possible 25% tariffs on Canadian and Mexican imports or until April 1, when agencies are to submit their studies on the impact of tariffs ordered by Trump.
The stakes of these policy decisions are high: Trade with Canada, China and Mexico accounts for 60% of the nearly $3 trillion in trade and approximately 11% of U.S. gross domestic product.
During times of policy upheaval, accessible metrics on currency volatility are indispensable for investors and globally active firms as they manage currency risks
