After the pound hit a two-and-a-half-year high against the dollar in September, Donald Trump’s victory on 5th November has allowed USD to regain its strength as we head into 2025. Trump’s proposed pro-growth and pro-inflation policies have been the main driver for renewed dollar strength since his win.
The market, however, is far from uniformly bullish on the dollar. With dollar hedging the hottest topic for our clients as we go into 2025, below we explore why such uncertainty abounds. And for our impact clients, also what this means for those operating in the global south, particularly in Africa.
"Broadly sideways"
From a Sterling perspective Trump’s approach, especially relative to that of the UK government, can be best characterised as expansionary. Indeed, a mix of tax cuts, increased tariffs, deregulation, and a return to greater use of fossil fuels, is likely to sustain higher inflation in the US compared to the UK In theory, this means that the Federal Reserve is likely to cut interest rates at a slower pace than the Bank of England.
As a result, futures markets had been pricing in around 60 basis points of interest rate cuts for the UK in 2025 and 67 basis points for the US. UK inflation data came in surprisingly strong at the end of December, however throwing doubt on whether the Bank of England will make such cuts. ‘Broadly sideways’ therefore is how many market participants are characterising how USD might perform in 2025. Within banks’ forecasts, however, there is a reasonable amount of disparity.
While the theory suggests Trump’s policies should be pro-growth and pro-inflation, the world is waiting for clarity on what his administration’s priorities will look like in practice. Indeed as we look to 2025, industry commentary suggests that current levels should at least be sustained, plenty of uncertainty remains, and it’s still “all to play for” over the year ahead.
Looking beyond the US
From an international perspective, while growth and inflation is good for USD strength, an overly "aggressive Trump" who mixes a strong cocktail of high tariffs, mass deportations, fiscal stimulus, and deregulation could also harm global growth. For example, a particularly aggressive Trump could see tariffs as high as 60% cast on Chinese goods. A move that would slow Chinese and global growth, and ultimately probably chill the US economy.
This potent mix of high inflation, and low growth could then unleash a nasty bout of stagflation in the US. It could also unleash a wave of retaliatory tariff measures against the US, similar to those seen in his first term. This tension comes into sharp focus when we look at rural America. A key voting block for Trump, their frustration against small town decline might pale if American agriculture suffers under new tariffs and labour supply shortages. Whether internal political pressure will allow Trump to step back from an overly aggressive stance, and take heed of this, is a key unknown factor for USD predictions in 2025.
Potential volatility
Some argue that it will be political skill that allows the Trump administration to navigate this landscape. In his first term, however, Trump bought his way out of the problem; disbursing $60 billion to compensate for the markets farmers lost due to the new tariff regime. If we do get a scenario where a slower economy threatens small town America’s allegiance, and this is simply resolved with bailouts, then despite the relatively small size ($60bn vs $26 trillion of USD total GDP is not massive beer), the market might take this as evidence of a broader agenda of spending, adding increased volatility to interest rate forecasts.
It is for that reason that far from being a pure boost to US growth, if such an aggressive Trump scenario unfolds, commentators fear his policies could lead to economic volatility, trade tensions, and market disruptions, potentially pushing the US into recession and weakening the dollar in the latter half of 2025. Extreme forecasts for the year reflect this uncertainty. Bank of America predicts GBP/USD rising from below 1.25 to 1.38 by the end of 2025, in contrast, ING forecasts sustained dollar strength, keeping GBP/USD at no higher than 1.24 for most of 2025.
To summarise for the year ahead, both USD buyers and sellers, in the UK and globally, face considerable uncertainty until Trump’s administration’s policies take shape and their effects on the US and global economies become clearer. There are reasons to be bullish for the dollar, but the knock-on effect of supply disruptions and labour shortages could lower the US's potential growth, leaving the Federal Reserve constrained in its ability to cut rates due to persistent inflation, but with a weakening economy.
Implications for Charities and Impact Funds operating In Africa
So what does this mean for those working in the purpose economy with operations in Emerging Markets and particularly Africa?
2024 was a difficult year for African economies, as capital left the continent to enjoy higher returns from higher US interest rates. If US interest rates stay higher for longer, we are going to see that capital flight continue. We may see a reprieve later in 2025 if the economy weakens and interest rates decline in anticipation of that.
Trump’s trade policies, particularly tariffs on Chinese goods, could suppress global growth and dampen demand for commodities. Commodities account for over 60% of total exports in many emerging markets and in 2022 alone Africa’s top ten commodity exporters collectively earned over $400 billion.
All these commodities (oil, gold, agricultural goods) are also priced in US dollars, and so when the dollar strengthens or weakens there are knock on effects: When the USD strengthens, commodities priced in dollars become more expensive for buyers using other currencies. This tends to suppress global demand for commodities, pushing prices down. Commodity-exporting nations like Nigeria (oil), Angola (oil), and Zambia (copper) all see economic weakness when global commodity prices drop.
For those countries outside the US, a strong dollar also reduces the purchasing power of their own currencies, making it costlier to import commodities, even if their prices remain stable. This creates an inflation in a country’s trade deficit and puts additional pressure on their currencies. Countries like Kenya and Ghana, which rely on oil imports, face heightened inflationary pressures in these strong dollar scenarios.
Many African nations also carry significant USD-denominated debt (cf Zambia’s 2023 restructure). A stronger dollar raises the local currency cost of servicing this debt, increasing fiscal strain. Governments often resort to borrowing more to meet obligations, deepening fiscal deficits.
The combination of weaker export revenues, higher import costs, and currency depreciation contributes to persistent inflation. Central banks in African countries may raise interest rates to combat inflation, but this risks stifling economic growth, creating a policy dilemma.
Innovation required in risk reduction?
These high local interest rates also create a high cost of hedging that cannot be moved around (for further detail please refer to our Hedging Guide For Impact Investors).
An innovative new approach to hedging is required, and GoodFX is determined to lead that. One approach we have developed with an Kenyan-based entity is a new structured finance approach which combines traditional financial instruments with the strategic use of philanthropic capital. This model not only mitigates FX risks but also catalyses sustainable investment across sectors, providing a blueprint for scaling impact in the face of uncertainty.
A collaborative solution for risk sharing
The core of this innovation lies in its unique risk-sharing mechanism. The model allows an impact-focused organisation to deploy its capital confidently, knowing that FX volatility is managed in a structured and sustainable way:
First-loss risk absorption: The deploying organisation absorbs the first tranche of FX losses, typically set at a modest percentage of the total exposure. This ensures the organisation remains accountable for managing its own financial health.
Philanthropic backstop: Losses beyond this threshold are absorbed by a philanthropic partner, creating a safety net that ensures the viability of the capital deployment, even in adverse market conditions.
This approach aligns private capital efficiency with philanthropic resilience, effectively de-risking investments in challenging markets.
Broader applications across sectors
While originally designed for an initiative in education, the principles behind this facility are broadly applicable. By reducing the cost and uncertainty of currency hedging, this model opens the door to new investments in healthcare, agriculture, renewable energy, and more.
For instance:
Non-profits seeking to expand operations in volatile markets can safeguard their financial plans.
Private investors with an impact mandate can scale their deployments without fear of currency instability.
Philanthropic funds can amplify their reach by de-risking critical projects in emerging markets.
Key components of the model
Structuring such a facility requires careful consideration of both market realities and operational flexibility.
Key features include:
Non-Deliverable Forwards (NDFs): These instruments, which settle offshore and are widely used in illiquid currency markets, provide the flexibility needed to hedge effectively in turbulent environments.*
Dynamic Risk Management: Rolling contracts, typically structured over 12-month periods, reduce the likelihood of outsized settlement obligations and allow periodic reassessment of market conditions.
Flexible Credit Terms: Negotiations with liquidity providers can yield aggressive deposit terms, potentially as low as 0%, especially when philanthropic partners act as risk guarantors.
Alignment of Interests: The model’s structure ensures all parties—investors, implementers, and guarantors—have a vested interest in the success of the underlying initiative.
The path forward: Scaling impact
This innovation represents a transformative step forward in mitigating FX risks for impact-focused investments. By blending philanthropic support with market mechanisms, it creates a pathway for sustained capital flows into emerging markets, even in times of global uncertainty.
As this model gains traction, its potential to unlock new opportunities across the global south cannot be overstated. By shielding organisations from the destabilising effects of currency volatility, philanthropic capital becomes a lever for systemic change, enabling private investments to drive measurable impact at scale.
The need for bold and adaptive solutions has never been greater. As we look ahead, this collaborative approach stands as a beacon of how innovative financial design can transform challenges into opportunities—ensuring that volatility does not stand in the way of progress.
*Appropriately regulated entities should be consulted on these products.