By Karen Brettell
(Reuters) – The dollar soared on Wednesday and was set for its biggest one-day gain since March 2020 after Republican Donald Trump won the U.S. presidential election, while the euro and Mexican peso were among the biggest losers from potential new tariffs in the USA regions.
Trump defeated Democrat Vice President Kamala Harris and retook the White House, while Republicans also gained a majority in the US Senate. Control of the House of Representatives remains in doubt, with Republicans currently holding a narrow majority.
A full breakthrough by Republicans would allow the party to make bigger policy changes and in turn would likely trigger bigger currency moves.
Trump’s policies of limiting illegal immigration, imposing new tariffs, lower taxes and deregulation could boost growth and inflation and limit the Federal Reserve’s ability to cut interest rates.
“This could further push up inflation and force the Fed into a slower easing path, which is good for the dollar,” said Nikos Tzabouras, senior market specialist at trading platform Tradu.
The eurozone, Mexico, China and Canada are believed to be at risk of potential new tariffs, which could hurt economic growth in the regions and widen their interest rate differentials with the United States.
Nick Wood, head of execution at MillTechFX and Millennium Global, notes that currency movements were orderly on Wednesday, with currency pairs generally seeing volumes around 25% to 30% above normal.
This may have been helped by investors taking relatively light positions in the run-up to the elections.
“It seems like elements of the market have actually been quite light in terms of risk, so therefore they can be a little more patient when it comes to entering positions, rather than feeling like you’re on the wrong side of something and to leave a position at high speed,” he said.
A complicating factor for the dollar’s longer-term prospects could be that Trump has expressed a preference for a weak US currency.
“Both this year, and during his previous stay in the White House, he had essentially challenged the long-standing mantra of the strong dollar, as he prefers a weaker currency to boost exports and U.S. economic activity to promote,” said Tzabouras.
“And he had also called for lower interest rates, so this could actually be a long-term headwind for the dollar as these policies start to take shape.”
The euro last rose 1.72% at 105.17 to reach 105.44, its highest level since July 3. The euro fell 1.91% to $1.0720 and fell to $1.0683, the lowest level since June 27.
The dollar rose 1.60% to 154.02 Japanese yen, reaching 154.48, the highest level since July 30.
The Japanese yen could now approach levels that prompted officials earlier this year to intervene and support the currency.
Japanese Cabinet Secretary Yoshimasa Hayashi said on Wednesday that the government plans to closely monitor movements in the currency market, including speculative movements, with a greater sense of urgency.
Trump has also expressed positive views on cryptocurrencies, driving Bitcoin to an all-time high of $75,389. It last rose 7.3% to $74,181.
The Fed is expected to cut rates by 25 basis points at the end of its two-day meeting on Thursday, and investors will also be watching for new clues on whether the US central bank could suspend cuts in December.
A much stronger-than-expected jobs report for September caused investors to lower their expectations of how often the Fed is likely to cut rates. A much weaker than expected report for October has cast some doubt on this view, although this data was clouded by the impact of recent hurricanes and labor strikes.
Traders now estimate a 65% chance that the Fed will also cut in December, up from 77% on Tuesday, according to CME Group’s Fed Watch Tool.
The Bank of England is expected to cut rates by 25 basis points on Thursday, while the Riksbank will see an easing of 50 basis points and Norges Bank is expected to remain unchanged.
