The US dollar experienced a significant surge on Wednesday, surpassing 155.60 yen and reaching its highest point in nearly four months. This sharp ascent can be attributed to investor speculation surrounding the incoming Trump administration’s plans to implement aggressive tariffs on imported goods. Experts believe these tariffs will dramatically reshape global currency markets and spark inflationary pressures within the US economy.
This recent surge in the greenback against the yen marks a reversal of losses incurred in early August, which were linked to weak US employment data and interventions from the Bank of Japan. The dollar’s strength over the past seven weeks, with gains in six out of seven, demonstrates a shift in market sentiment.
While the US Consumer Price Index (CPI) report released on Wednesday confirmed inflation accelerating to 2.6% year-over-year in October 2024, aligning with economists’ expectations, this data failed to curb the dollar’s momentum. Core CPI inflation, which excludes volatile food and energy prices, remained steady at 3.3% for the third consecutive month. These in-line inflation figures quelled concerns about the Federal Reserve potentially pausing interest rate hikes in December. Instead, speculators are now heavily betting on a 25-basis-point rate cut in the coming months, with market-implied probabilities exceeding 80% according to CME FedWatch.
The Invesco DB USD Index Bullish Fund ETF (UUP), a trade-weighted index tracking the dollar’s performance, reached its highest point in over a year. This demonstrates the strong investor confidence in the greenback.
Much of the dollar’s recent strength can be attributed to the anticipated impact of Trump’s proposed tariffs. During his campaign, Trump hinted at imposing tariffs as high as 60% on goods imported from China. Additional tariff hikes of 10% to 20% on imports from other countries are also expected. These tariffs could significantly impact US demand for foreign products, leading to a reduced need for American companies to purchase foreign currencies and subsequently boosting the dollar.
Furthermore, the tariffs could potentially drive up domestic inflation, which could prompt the Federal Reserve to reconsider its dovish stance on interest rate cuts, further fueling the dollar’s rally. George Vessey, a forex strategist at Convera, stated that Trump’s policies, including trade wars where the US is less exposed and more fiscally stimulative measures, are expected to enhance US economic outperformance in the near term compared to its G10 peers. He highlighted that economic momentum has shifted back in favor of the US.
As global investors adjust to the new political landscape, their expectations for the US dollar have significantly increased. The Bank of America Fund Manager Survey, conducted before the election, revealed that 31% of respondents anticipated the dollar to be a top performer in 2025, narrowly trailing the yen at 32%. However, following the election, the dollar surged to the top spot, with 45% of respondents identifying it as their favored currency for 2025, while the yen’s popularity dropped to 20%.
JPMorgan’s pre-election analysis suggested that a ‘Republican sweep’ scenario, which would result in a GOP majority in both the House and Senate, would lead to substantial gains for the dollar. In this scenario, the trade-weighted dollar index is projected to climb by 7.3%, with some of the most significant moves anticipated against the Swedish krona (SEK) at +10.8% and the euro (EUR) at +8.4%.
David Morrison, senior market analyst at Trade Nation, emphasized the role of rising US bond yields in supporting the dollar’s resurgence. He explained that investors are betting on the Trump presidency, with its promises of tax cuts and deregulation, to lead to increased economic growth. This optimistic outlook, coupled with the perception of sclerotic economies in Europe and the UK, is expected to propel US economic performance above its European counterparts.
The prospect of new US tariffs has put European leaders on edge. French President Emmanuel Macron expressed concerns about escalating risks for global supply chains if the US, Europe, and China re-enter a trade war. American tariffs are likely to significantly impact European exports of machinery and pharmaceuticals, potentially creating economic headwinds for already weakened European economies.
