The incoming administration’s plans for looser fiscal and tighter immigration policy make a strong case for a dollar rally, ING bank said.
The U.S. dollar reached a four-month high following former President Donald Trump’s election victory, driven by investor optimism about the incoming Republican administration.
On Nov. 6, when Trump declared victory, the U.S. dollar index rose by 1.34 percent. It surged in the following days, reaching a peak of 106.18 on Tuesday, surpassing the high reached on June 26.
The index was trading at 106.05 as of 5:50 a.m. EST on Wednesday, up by 2.7 percent from the Nov. 6 opening. During his election campaign, Trump promised many pro-business policies and measures to stimulate the economy, including cutting taxes for workers, reducing corporate taxes to 15 percent, ending inflation, making America the dominant global energy producer and a “manufacturing superpower,” and keeping the U.S. dollar as the world’s reserve currency.
Since his decisive win, the dollar has surged as investors expect these policies, if they materialize, to have a positive impact on the nation’s economy and its currency.
“Our advice is not to overthink it and instead take the firm view that the new administration’s plans for looser fiscal and tighter immigration policy, when combined with relatively higher US rates and protectionism, all make a strong case for a dollar rally,” ING bank said in a Nov. 13 report.
While the U.S. economy could end up overheating, the dollar will potentially attract more investors next year, according to ING.
There will be “occasional setbacks” to the dollar’s bull trend. “But the over-arching trend should be a dollar-positive one. And positive enough to see the dollar trade-weighted index break to the upside of a two-year range,” the bank’s report states.
Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research, said that the U.S. dollar is “moving up sharply in thin trading,” according to a Nov. 11 post on the social media platform X. Thin trading means the currency was trading with low volume.
“The prospect of stimulative fiscal policy with fewer Fed rate cuts keeps propelling it higher,” she said.
Wealth management company UBS was less enthusiastic about a big dollar rally. Gains are expected to “fade over the medium term,” it said in a Nov. 7 report.
“The dollar’s overvaluation and the US’s significant twin fiscal and current account deficits are likely to weigh on the currency over time. Investors should therefore consider using current dollar strength to diversify into other G10 currencies,” the report stated, referring to currencies from countries such as the UK, Japan, Germany, and France.Trump’s proposed tariffs also affect the U.S. dollar. The president-elect said he plans to impose 60 percent tariffs on goods from China, with 10–20 percent tariffs on goods imported from other nations.
If these tariffs are levied, it could benefit domestic manufacturing. The measure could also trigger an increase in inflation. As a consequence, the U.S. Federal Reserve may be more hesitant to cut interest rates.
And as long as rates remain high, the U.S. dollar remains attractive to investors, thus boosting its value.
Investors are expecting the Fed to announce a rate cut in the December meeting. More than 80 percent of interest rate traders estimate a 50-point reduction in rates to be declared next month, according to data from the CME FedWatch tool as of Nov. 13, while less than 20 percent are expecting a 25-point cut.
A June 6 report from Goldman Sachs predicted the U.S. dollar to remain “stronger for longer” over the next 12 months. A key reason for this view was the strength of the U.S. economy.
“Despite high interest rates, the US economy is doing pretty well, supporting US stocks. And the rate cuts that we are likely to see within the next 12 months should not erode the yield on dollar bonds too far either,” the report said. “Better growth or asset market returns in the rest of the world are the main channel for a weaker US dollar, but there are also some scenarios that could push the dollar even stronger than it is now. Overall, we will continue to live in a strong US dollar world with a number of risk factors that should support the currency.”
Any erosion in the dollar’s value is expected to be gradual, it said.