By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Newly-elected U.S. President Donald Trump’s impending return to the White House and fading hopes for aggressive rate cuts have pushed the dollar to a multi-year high, and investors see this strength continuing, helped by pro measures from the new government. growth and inflation policies.
The , which measures the dollar’s strength against six major currencies, has risen nearly 10% from a late September low to a more than two-year high.
Many of these gains have come since Trump’s victory in the November election, as investors rushed to prepare portfolios for the new administration’s trade and tariff policies, which are expected to provide near-term dollar support while will put pressure on economies and currencies.
Rates, with their potentially inflationary pressure, could prompt the Fed to be cautious about rate cuts, even as trade tensions dim the outlook for global economic growth and more investors seek the safe-haven dollar.
The longer US interest rates remain higher than rates in other developed economies, the greater the dollar’s appeal to investors.
Although Trump has often complained that the dollar’s excessive strength is weakening the competitiveness of U.S. exports and hurting U.S. manufacturing and employment, his policies are often seen by the market as a boost to the dollar.
During Trump’s first term, the dollar rose about 13% from February 2018 to February 2020, when he imposed tariffs on several countries, including China and Mexico.
In a further nod to the importance of dollar policy to the new administration, Scott Bessent, Trump’s pick to lead the Treasury Department, said Wednesday he would ensure the dollar remains the world’s reserve currency.
Traders in currency futures markets appear positioned for further dollar strength, with net bets on the greenback rising to a nearly six-year high of $34.28, according to data from the Commodity Futures Trading Commission.
According to BofA Global Research, compared to a weighted basket of different currencies, the dollar is the most overvalued in 55 years.
Typically, such a significant rally would attract dollar bears anticipating a reversal, but few investors currently believe it is wise to question the rising dollar.
“We continue to view the dollar as fundamentally overvalued, but it is difficult, at least in the short term, to think of catalysts that could weaken the dollar,” said Brian Rose, senior U.S. economist at UBS Global Wealth Management.
The presidential inauguration on Monday is a major reason to hold back dollar bears, investors say. While the dollar has recovered on expectations for broad rates, the details remain unclear.
“We don’t know how strong they will be, how intense, how broad, how high,” said John Velis, head of FX and macro strategy for the Americas, at BNY Markets. Clarity on these fronts could further boost the dollar, making it dangerous to bet against the currency even at these high levels.
Investors got a taste of how sensitive the dollar can be to tariff-related news on Jan. 6, when the greenback fell about 1% against a basket of currencies following a Washington Post report suggesting Trump aides were considering limited tariff plans. The dollar quickly recovered after Trump denied the story.
As long as rate uncertainty continues, investors will have a hard time abandoning their bullish dollar bets.
“I think people are waiting, at least for these major policy announcements, to get out of the way before closing positions,” said Thierry Wizman, global FX & Rates strategist at Macquarie.
On Monday, Goldman Sachs strategists, who forecast the dollar will rise another 5% this year, said the dollar could rise even further if the U.S. economy continues to outperform despite higher rates and markets begin to anticipate possible Fed rate hikes pricing instead of reductions.
Trump’s election campaign platform of aggressive tariffs and deportation of some immigrants has already raised concerns about inflation among policymakers, minutes from last month’s Fed meeting showed.
“There’s been a pretty clear change in tone from the Fed towards being more hawkish,” Macquarie’s Wizman said.
In the meantime, the dollar is well supported by a perfect storm of positive catalysts, including a significant improvement in the US growth outlook and subdued expectations for Fed rate cuts.
Recent data showing US job growth unexpectedly accelerated in December reinforced the Fed’s cautious approach to rate cuts this year, but Wednesday’s inflation data offered signs of easing underlying price pressures, prompting financial markets to bet on a rate cut in June.
“The US is outperforming both in terms of high interest rates and better growth,” said Aaron Hurd, senior currency portfolio manager State Street (NYSE:) Global Advisors.
Treasury yields have risen in recent weeks, with the US 10-year yield rising to a 14-month high on strong economic data and expectations that the Fed could be ready to cut rates as it braces for the implementation of Trump’s policies.
While Hurd is positioned for dollar weakness over the next three to five years, he doesn’t rule out further gains for the U.S. currency in the near term. “There’s still a little bit of room for dollar strength here,” Hurd said.
