By Saqib Iqbal Ahmed
NEW YORK (Reuters) – U.S. President Donald Trump's imminent return to the White House and fading hopes for aggressive interest rate cuts have pushed the dollar to multi-year highs, and investors are to see this strength continue, with the support of supporters of the new administration. growth and inflation policies.
The , which measures the greenback's strength against six major currencies, has risen nearly 10% from its lows in September to a more than two-year high.
Many of these gains have occurred since Trump won the November election, as investors raced to prepare tables for the new administration's trade and tariff policies, which are expected to provide dollar support near term while putting pressure on other economies and currencies.
Tariffs with their inflationary pressures could prompt the Fed to be cautious with rate cuts, even as trade tensions darken the outlook for global economic growth and send more investors seeking the dollar a safe haven.
The longer US interest rates remain higher than yields in other developed economies, the more attractive the buck will be to investors.
Although Trump has often complained that the excessive strength of the dollar is damaging the competitiveness of US exports and hurting US manufacturing and jobs, the market often sees his policies as a boost on the dollar.
During Trump's first term, the dollar rallied about 13% from February 2018 to February 2020 when he implemented tariffs against several countries, including China and Mexico.
In another nod to the importance of dollar policy to the incoming administration, Scott Bessent, Trump's pick to head the Treasury Department, said Wednesday he would ensure the dollar remains the nation's reserve currency. – world
Traders in currency futures markets appear set for more dollar strength with net bets on the dollar rising to a near six-year high of $34.28, according to Commodity Futures Trading Commission data.
Against a weighted basket of several currencies, the dollar is the most it has been in 55 years, according to BofA Global Research.
Normally, such a significant rally would attract dollar bears expecting a reversal, but many investors do not believe it is wise to challenge the rising dollar.
“We continue to see the dollar as overvalued, but, at least in the short term, it is difficult to come up with catalysts that would cause the dollar to weaken,” said Brian Rose, senior US economist at UBS Global Wealth Management.
The inauguration of the president on Monday is one big factor holding back dollar bears, investors said. Although the buck has been expecting extensive fees, the details are still unclear.
“We don't know how strong they are going to 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 boost the dollar further, making it risky to bet against the currency even at these high levels.
Investors had a taste of how sensitive the dollar could be to news related to tariffs on January 6, when the dollar fell about 1% against a basket of currencies after a Washington Post report suggested that Trump supporters were considering limited tariff plans. The dollar quickly rebounded after Trump denied the story.
As long as tariff uncertainty persists, investors will have a hard time letting go of their bullish dollar commitments.
“I think people are waiting, at least for these important 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 expected the dollar to rise another 5% this year, said the buck could rally even more if the US economy continues to perform better despite tariffs higher, and that markets are starting to price in a possible Fed rate hike instead of cuts.
Trump's campaign platform of aggressive tariffs and the deportation of some immigrants has already raised concerns among policymakers about inflation, minutes of the Fed's meeting last month showed.
“You've had a very noticeable shift in tone coming from the Fed to more hawkishness,” Wizman Macquarie said.
In the meantime, the dollar is well supported by a perfect storm of positive motivators including a significant improvement in the US growth outlook and renewed expectations for Fed rate cuts.
Recent data showing unexpected US job growth in December reinforced the Fed's cautious approach to rate cuts this year, but inflation data on Wednesday offered signs that core price pressures were easing, encouraging financial markets to bet on a rate cut in June.
“The US is outperforming both in terms of high yields and better growth,” said Aaron Hurd, senior portfolio manager, funds, at 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 of possible Fed cuts rate while climbing for the implementation of Trump's policies.
While Hurd is positioning for dollar weakness in the three to five year time frame, he is not ruling out further near-term gains for the US currency. “There's still some room for dollar strength here,” Hurd said.
