Investing.com – The US dollar has benefited from the country’s recent election results, and Morgan Stanley (NYSE:) expects more strengthening in the future as the new Trump administration begins to implement its proposed policies.
At 05:40 ET (10:40 GMT), the Dollar Index, which tracks the dollar against a basket of six other currencies, was trading 0.3% higher at 105.802, its highest level since early July.
“The final results of the U.S. election have not yet been confirmed, but we think it is reasonable to think that a Republican victory appears likely,” Morgan Stanley analysts said in a Nov. 11 note.
“Our work ahead of the US elections has identified a Republican victory as the most positive outcome for the US dollar and we reaffirmed our expectation of a dollar rally” last week.
The bank’s expectation that the dollar will rise is based on three main reasons:
Pricing of tariff risks: Customer conversations leading up to the US election revealed a wide range of views on the likelihood that tariffs would be introduced. We believe that the Republicans’ proposed policy on tariffs should be taken seriously and if the news flow were to confirm its likelihood, we expect investors to respond by buying USD, especially against the currencies of economies that most affected by any tariffs.
Better data and higher UST returns: Our US yields team has raised the possibility of higher US Treasury yields at year-end, thanks to better data now that the US elections are behind us and the hurricane season is unlikely to weigh on wage growth. This would support the USD broadly.
Upside risks for the USD in fiscal policyMorgan Stanley’s starting point for fiscal policy changes in a Republican sweep is for an extension of the TCJA, meaning the impact won’t occur until 2026 and does not imply significant fiscal stimulus as it simply extends the status quo. Given the limited impact we see, the risks are likely positive for the market.
“Sequencing is especially important. “If the future administration focuses on rates early and also brings forward fiscal support to make an impact in 2025, we think the USD impact is likely to be greater sooner,” Morgan Stanley said.
