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The stories that matter on money and politics in the race for the White House
The US dollar has surged to its highest level since August, driven by strong economic data and growing investor confidence in Donald Trump’s chances of winning the upcoming presidential election.
The currency has gained almost 4% against a basket of currencies since late September, supported by robust US employment figures that have led investors to revise their expectations for Federal Reserve interest rate cuts.
Market analysts believe that the increasing likelihood of a second Trump administration has further boosted the dollar’s rally, as Trump’s proposed policies, such as imposing tariffs on imports, are anticipated to raise inflation and interest rates if he secures victory on November 5.
“The markets are adjusting to reflect a higher probability of a Trump win,” stated Lee Hardman, senior currency analyst at MUFG.
Betting markets and polls in key swing states indicating a shift in favor of the former president have prompted investors to assess the potential market implications of policies aimed at increasing tariffs, restricting immigration, and cutting taxes.
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While Trump has expressed a desire to weaken the dollar, many investors believe that his economic agenda would actually strengthen the currency, especially if the Republicans secure control of the White House and both houses of Congress.
Citi reported that its hedge fund clients, encouraged by the changing odds in the US election, have been increasing their dollar holdings at the fastest pace in two years. Barclays noted an “election premium” in the dollar, attributing the recent gains not solely to the shift in Fed expectations.
Thierry Wizman, global foreign exchange and interest rate strategist at Macquarie, pointed to two main factors driving the dollar’s recent strength: the resurgence of strong US economic data and the so-called “Trump trade” effect.
Wizman explained that Trump’s economic policies are typically associated with higher inflation, leading to a less aggressive approach to interest rate cuts by the Fed in the coming years.
Anticipation of slower rate cuts by the Fed has also triggered a sell-off in longer-term US Treasuries, pushing the yield on the 10-year government bond to its highest level since July.
Swaps markets are pricing in one or two additional Fed cuts this year, suggesting a significant possibility that the central bank may hold rates steady at one of its upcoming meetings. This contrasts with expectations from just a month ago, when investors were anticipating rate cuts at each meeting.
The sudden shift, following the Fed’s recent rate cuts from a 23-year high, has created volatility in the Treasuries market, with the Ice BofA Move index reaching its highest level since the previous year’s end.
However, as the US election outcome remains highly uncertain, many analysts believe that most investors are hesitant to make significant bets at this stage.
Tim Baker, Deutsche Bank’s head of FX research for the Americas, acknowledged that a Trump victory would likely benefit the dollar, but he believes that scenario is still ahead in the future.
Mark McCormick, global head of FX and EM strategy at TD Securities, described the election as a “binary event with significant risks on both sides”.