The success of Donald Trump in the 2024 U.S. presidential election has helped Wall Street believe in the dollar again.
Without a doubt, the dollar had begun to rise before Trump won a second term on November 5. Investors’ worries about a possible contested result had caused expectations of more volatility in the stock and bond markets to rise. But Trump was able to claim win soon after the polls closed. This made it possible for stocks, the dollar, and Treasury yields to rise to all-time highs on Wednesday morning.
Since then, the dollar has kept getting stronger, making the biggest gains against emerging-market rivals like the Mexican peso (USDMXN 1.37%). This is because people think that Trump’s policies, which include tax cuts, tariffs, and mass deportations, will be good for the dollar.
Part of this movement comes from the belief that Trump’s tariffs will make more people want to buy U.S. dollars compared to other currencies, while tax cuts could make the deficit bigger and Treasury yields go up, which would make the dollar even stronger. Many sell-side investment banks and study firms on Wall Street are sure that the dollar will get stronger over the next year.
Cutting taxes on businesses and loosening rules could also help them make more money and keep the economy growing faster than in Europe and Japan, where the euro (EURUSD -0.42%) and the yen (USDJPY 0.70%) are used. In the past, the dollar has done well when the U.S. economy was strong compared to the rest of the world.
The value of a key indicator of the dollar hit a four-month high on Monday, even though U.S. bond markets were closed for the Veterans Day holiday. That same day, the ICE U.S. Dollar Index DXY 0.45% hit its highest level since July 3 and then went up 0.5% to trade at 105.49, according to FactSet.
This means that the dollar has almost completely recovered all of its losses from the third quarter, when it fell sharply because people thought the Federal Reserve would cut interest rates quickly.
Usually, changes in the yields on government bonds have a big effect on the exchange markets. Steve Englander, global head of G-10 currency studies at Standard Chartered, says that wasn’t the case in October.
According to his analysis, roughly 60% of the greenback’s advance last month was driven by Trump’s favorable odds in online betting markets.
Putting politics aside, the U.S. dollar has a good economic outlook. It’s still going strong for the U.S. economy; in the third quarter, GDP grew at a rate of 2.8% per year.
The latest figures on personal consumption and expenditures show that consumers continued to spend a lot in September. On the other hand, inflation has kept slowly moving toward the Federal Reserve’s 2% goal.
In the past few months, market-based measures such as the five-year breakeven inflation rate have gone up. This is because people think that a strong economy will keep price pressures high. The wave of inflation that hit stocks and bonds in 2022, on the other hand, is not likely to happen again.
This should make the Fed want to keep lowering its policy interest rate goal. The dollar should lose value if all other things stay the same and interest rates go down. Bond prices, on the other hand, have gone up since September, when the Fed started cutting rates by 50 basis points.
Wall Street thinks the European Central Bank will move even faster, even if the Fed keeps cutting rates. Japan is currently raising interest rates, but the Bank of Japan is likely to move more slowly going forward. This is because a strong policy rate hike in late July caused a global stock market crash.
The same value as the euro
Wall Street is focusing on how much better the dollar looks than its biggest enemy, the euro, because of unrest in Europe and a weak economy there.
Experts in the currency markets at Capital Economics and J.P. Morgan Securities told MarketWatch on Monday that they thought the shared currency would lose value until it was equal to the dollar in 2025, when “U.S. exceptionalism” would rule.
The J.P. Morgan Securities team wrote, “No other currency has what the dollar has: better growth and stocks, higher yield, and defensive qualities.”
Traders seem to agree. According to the most recent data from the Commodity Futures Trading Commission, traders continued to increase their long bets on the dollar using futures contracts. This was seen in how the futures market was positioned.
But some people warned that currency traders might be jumping the gun when they bet that the new Trump administration’s policies would be put into place quickly. In fact, the dollar might be more likely to fall in the near future if Trump takes longer to carry out his tax plan, for example.
Englander said, “I think there’s more risk on both sides.” “People expect [Trump] to jump right into the tariff issue. If he doesn’t—maybe he says we’ll negotiate for a year and then put tariffs in place if we can’t reach a deal—I think that would be a dollar-negative surprise.”
Some people, like Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, think that the so-called “bond vigilantes” could rebel and stop some of the Republicans’ plans to cut taxes.
It’s possible that Trump and Vice President-elect J.D. Vance would like it if the dollar got weaker. Both have said they are worried that the continuously strong dollar is making it harder for U.S. exporters to compete on the world market.
Because of this, some people have thought about what radical steps the new government might take to weaken the dollar. A “Mar-a-Lago Accord” is one idea that has been put forward: trying to reach a deal with rival countries to step in and weaken the dollar.
That’s a reference to the Plaza Accord, which was made in the mid-1980s and called for the U.S. and a number of important partners to work together to weaken the dollar. It’s still unclear whether the new government has the drive or the support of other countries to reach such an agreement.
The team at Capital Economics said that the dollar has been strong compared to other currencies for most of the last ten years.
Things look like they will stay the same during a second Trump administration for now.
