As the polls and prediction markets showed Donald J. 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 Wednesday, 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 destabilizing effect on the global economy, because the U.S. currency is on one side of nearly 90 percent 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 U.S. 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 Mr. Trump has often said that, for the sake of U.S. 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 percent 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 percent and the Mexican peso more than 17 percent 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 Steven Englander, a foreign exchange analyst at Standard Chartered.
Sweeping tariffs, a signature campaign promise by Mr. 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 United States 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.
Matt Bush, U.S. economist at Guggenheim Investments, said the dollar’s strength reflected “U.S. 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 JPMorgan had predicted that such an outcome would cause the dollar index to gain another 7 percent in a matter of months, fueled by a weakening euro and Chinese renminbi. Analysts at Barclays forecast the dollar’s becoming worth as much as the euro for the first time in two years if Mr. Trump follows through with a 60 percent tariff on Chinese imports and a 10 percent levy on all other imports.
There could be lessons from Mr. Trump’s first term. The dollar also jumped after he was elected in 2016, accompanied by rising stocks and higher bond yields, a similar pattern 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 by about 10 percent in 2017. The Trump trade became the “Trump fade.”
Mr. 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 Société Générale don’t think the dollar can rise much higher in the coming months, predicting that it will peak by the end of 2024, mirroring Mr. Trump’s first term.
“As long as stronger U.S. growth, higher U.S. 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 Mr. Trump first enacted tariffs, China retaliated with tariffs of its own, hitting American goods like soybeans. More recently, China and Japan stepped into markets to support their currencies, and they are expected to do so again if the renminbi and yen weaken further.
Some investors think that the potential for geopolitical turmoil resulting from aggressive tariffs may lead Mr. Trump to water down his approach.
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.
There are other considerations that could weaken the dollar over time.
Mr. Trump’s policies on tariffs, taxes and spending have raised concerns about the federal deficit, reflected in a rise in yields on long-term Treasury debt. The U.S. government is reliant on foreign investors to maintain its enormous debt load — Japan and China own roughly $2 trillion of U.S. Treasury debt combined — and if they are reluctant to lend, it could reduce demand for U.S. assets, weakening the dollar.
The wars in the Middle East and Ukraine, with uncertain effects on energy supplies and trading routes, also have implications for the dollar, as do potentially unforeseen events in U.S. markets as an emboldened new administration takes charge.
Many market watchers have said it was simply too difficult to make accurate predictions at the moment. Jerome H. 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.
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