Why is the dollar getting stronger and stronger?

As polls and prediction markets showed that Donald J. Trump was likely to return to the White House, the value of the dollar began to rise. When the result became clear, he fired.

The day after the elections, the dollar rose more than in years against a basket of other major currencies. And it has continued to rise, hitting a new high for the year on Wednesday, as economists and traders analyzed the president-elect’s proposed policies and revised their forecasts for the world’s dominant currency.

Such strength is a sudden change after three months of sustained weakening, with the dollar hitting its lowest point of the year in late September. Sharp movements in the value of the dollar can have a destabilizing effect on the global economy, because the US currency is involved in nearly 90 percent of all currency transactions. Commodities, such as oil, are usually priced in dollars.

A stronger dollar makes it cheaper for Americans to buy foreign goods and travel abroad, but U.S. companies that export goods may become less competitive. Outside the United States, a strengthening dollar fuels inflation in countries with weaker currencies and makes it harder to pay off dollar-denominated debts, weighing on the global economy.

The recent rise may seem curious, because Trump has often said that, for the sake of American exports, he would prefer to see the dollar weaken. But most economists assume that his plans to impose tariffs on imports and reduce taxes, among other measures, will have the opposite effect.

Traders seem to agree that the broad-based dollar index is up about 3 percent since election day, a big move for that market in such a short period. Almost all major currencies have lost value against the dollar this year, with sharp declines in recent weeks. The Japanese yen has fallen about 9 percent and the Mexican peso more than 17 percent against the dollar since the beginning of the year.

The benefits of a stronger dollar, in terms of purchasing power for American households and businesses, are eroded if accompanied by rising interest rates and higher inflation, as was the case during a period of dollar strength in 2022. .Some analysts and investors, who believe that the dollar could strengthen further in the coming months which would make many Americans feel comparatively poorer.

Much depends on whether the Trump administration’s campaign promises become reality.

“Trump is the big driver of the dollar,” said Steven Englander, a currency analyst at Standard Chartered.

Across-the-board tariffs, a signature Trump campaign promise, would in effect mean taxes on all imported goods. Defenders of these practices say that by making imports more expensive, tariffs promote domestic alternatives.

However, for auto companies that build or buy parts abroad or apparel firms with factories spread around the world, moving production to the United States is expensive and would take time. Therefore, the immediate effect of tariffs is generally to make products more expensive for companies and consumers, reducing demand for imports priced in foreign currency, which tends to raise the value of the dollar.

Rising prices (i.e., faster inflation) can prompt the Federal Reserve to raise interest rates. And higher interest rates attract investment from investors seeking higher returns, further increasing demand for dollars.

Matt Bush, US economist at Guggenheim Investments, said the dollar’s strength reflected “American exceptionalism” in terms of its stronger economy, as well as the potential for higher inflation.

Republicans have retained control of the House of Representatives, giving them full control of Congress as well as the White House. JPMorgan analysts had predicted such an outcome would see the dollar index gain another 7 percent within months, boosted by a weakening euro and the Chinese renminbi. Barclays analysts predict that The dollar will reach a value similar to that of the euro for the first time in two years if Trump goes ahead with a 60 percent tariff on Chinese imports and a 10 percent levy on all other imports.

Trump’s first term could provide lessons. The dollar also rose after he was elected in 2016, accompanied by rising stocks and higher bond yields, a pattern similar to the “Trump trade” that has emerged recently.

The dollar index rose more than 5 percent from Election Day to the end of that year. But political gridlock, despite Republican control of the House and Senate, led to a dollar that weakened about 10 percent in 2017. The Trump trade became the “Trump fade.”

Trump’s first term began against a backdrop of low growth and inflation. Interest rates were near zero and the dollar was rising from a lower base. You are inheriting a very different economy this time.

Société Générale analysts They do not believe that the dollar can rise much more in the coming months and predict it will peak in late 2024, mirroring Trump’s first term.

“As long as stronger US growth, higher US interest rates, and the world’s confidence in the health of the dollar are intact, the dollar will remain highly valued, but we doubt it can become much more valued,” the analysts wrote. in a recent research report.

A potential obstacle to further strengthening of the dollar is that other countries may take steps to resist it. When Trump first imposed tariffs, China responded with its own tariffs, affecting American products such as soybeans. More recently, China and Japan turned to the markets to support their currencies, and are expected to do so again if the renminbi and yen weaken further.

Some investors believe that the potential for geopolitical unrest resulting from aggressive tariffs may lead Trump to soften his strategy. Alan McKnight, chief investment officer at Regions Bank, said “very targeted” tariffs could be positive for the economy. “If it is a generalized measure, it is problematic,” he said.

There are other considerations that could weaken the dollar over time. Trump’s policies on trade tariffs, taxes and spending have raised concerns about the federal deficit, reflected in rising yields on long-term Treasury debt.

The U.S. government relies on foreign investors to maintain its huge debt load (Japan and China hold roughly $2 trillion of U.S. Treasury debt combined) and if they are reluctant to lend, demand for it could be reduced. US assets, weakening the dollar.

Wars in the Middle East and Ukraine, with uncertain effects on energy supplies and trade routes, also have implications for the dollar, as do potentially unforeseen events in US markets as an emboldened new administration takes power.

Many market observers have said that it was simply too difficult to make predictions accurate at this time. Jerome Powell, chairman of the Federal Reserve, declined to comment on the economic impact of the new administration, saying he did not yet have enough details to make an analysis.

For Standard Chartered’s Englander, that means the coming months could be “risky. There are a number of policy decisions that still need to be made,” he said.