4 hours Ago By The Straits Times
The day after the election, the dollar rose the most it had in years against a basket of other major currencies. As the polls and prediction markets showed Donald Trump looking more likely to return to the White House, the value of the dollar began to rise. When the result became clear, it soared.
The day after the election, the dollar rose the most it had in years against a basket of other major currencies. And it has continued to rise, hitting a fresh high for the year on Nov 13, as economists and traders considered the policies proposed by the President-elect and revised their forecasts for the world’s dominant currency. Such strength is a sharp shift from three months of sustained weakening, with the dollar hitting its low point for the year at the end of September.
Sharp moves in the value of the dollar can have a destabilising effect on the global economy, because the US currency is on one side of nearly 90 per cent of all foreign exchange transactions. Essential commodities, like oil, are typically priced in dollars. A stronger dollar makes it cheaper for Americans to buy foreign goods and to travel abroad, but US companies that export products may become less competitive.
Outside the United States, a strengthening dollar stokes inflation in countries with weaker currencies and makes it harder to pay debts denominated in dollars, weighing on the global economy. Why does the dollar keep getting stronger? The recent rise may seem curious, because Trump has often said that, for the sake of US exports, he would prefer to see the dollar weaken. But his plans to impose tariffs on imports and cut taxes, among other actions, are expected by most economists to do the opposite.
Traders appear to agree: The broad-based dollar index is up about 3 per cent since Election Day, a big move for that market over such a short period. Almost every major currency has lost value against the dollar this year, with pronounced declines in recent weeks. The Japanese yen is down about 9 per cent and the Mexican peso more than 17 per cent against the dollar since the start of the year.
The benefits of a stronger dollar, in terms of buying power for American households and businesses, erode if accompanied by rising interest rates and higher inflation, as was the case during a bout of dollar strength in 2022. Some analysts and investors, who think the dollar could get even stronger in the coming months, see this combination as possible again, which would likely leave many Americans feeling comparatively poorer. Much depends on whether the Trump administration’s campaign pledges turn into reality.
“Trump is the big dollar driver,” said Standard Chartered foreign exchange analyst Steven Englander. Sweeping tariffs, a signature campaign promise by Trump, would in effect impose taxes on all imported goods. Proponents say that by making imports more expensive, tariffs promote domestic alternatives.
However, for car companies that build or buy parts from overseas or clothing firms with factories scattered around the world, moving production to the US is costly and would take time. That’s why the immediate effect of tariffs is generally to make things more expensive for businesses and consumers, reducing demand for imports priced in foreign currencies, which tends to push up the value of the dollar. Rising prices (that is, faster inflation) can prompt the Federal Reserve to raise interest rates.
And higher interest rates attract investment from investors seeking higher returns, further increasing the demand for dollars. Mr Matt Bush, US economist at Guggenheim Investments, said the dollar’s strength reflected “US exceptionalism” in terms of its stronger economy as well as the potential for higher inflation. How much stronger could the dollar get? Republicans have retained control of the House, putting them in full control of Congress in addition to the White House.
Analysts at J.P. Morgan had predicted that such an outcome would cause the dollar index to gain another 7 per cent in a matter of months, fuelled by a weakening euro and Chinese yuan.
Analysts at Barclays forecast the dollar’s becoming worth as much as the euro for the first time in two years if Trump follows through with a 60 per cent tariff on Chinese imports and a 10 per cent levy on all other imports. Trump’s first term started against a backdrop of low growth and inflation. Interest rates were close to zero, and the dollar was rising from a lower base.
He is inheriting a much different economy this time. What might hold the dollar back? Analysts at Societe Generale don’t think the dollar can rise much higher in the coming months, predicting that it will peak by the end of 2024, mirroring Trump’s first term. “As long as stronger US growth, higher US interest rates and the world’s confidence in the dollar’s status are all intact, the dollar will remain very highly valued, but we doubt it can get much more highly valued,” the analysts wrote in a recent research report.
One potential obstacle to a further strengthening dollar: Other countries may take measures to resist it. When Trump first enacted tariffs, China retaliated with tariffs of its own, hitting American goods like soya beans. More recently, China and Japan stepped into markets to support their currencies, and they are expected to do so again if the yuan and yen weaken further.
Some investors think the potential for geopolitical turmoil resulting from aggressive tariffs may lead Trump to water down his approach. Mr Alan McKnight, chief investment officer at Regions Bank, said “laser focused” tariffs could prove positive for the economy. “If it’s broad based, it’s problematic,” he said.
Many market watchers have said it was simply too difficult to make accurate predictions at the moment. Mr Jerome Powell, chair of the Federal Reserve, declined to comment on the economic impact of the new administration, saying he didn’t yet have enough details to make an analysis. For Mr Englander at Standard Chartered, that means the coming months could be “dicey.
” “There are a set of political decisions that still need to be made,” he said. NYTIMES Join ST's Telegram channel and get the latest breaking news delivered to you. Read 3 articles and stand to win rewards Spin the wheel now.
