Opinion
Dollar strength in focus amid US growth exceptionalism
Trump likes the dollar’s role as the world’s reserve asset, and the accompanying economic and geopolitical power. But he also wants a weak enough foreign-exchange rate to buoy the US manufacturing sector
November 26, 2024 | 11:57 PM
The greenback has an overarching sway over the financial world with the central role US banks and the currency play in the global economy.The dollar last week posted its longest weekly advance in over a year as Donald Trump’s presidential victory and persistent economic growth pushed traders to boost their bets on further gains.The Bloomberg Dollar Spot Index climbed as much as 0.7% last Friday, capping an eight-week rally, the longest since September 2023.The euro fell to a two-year low and the Swiss franc slid to the weakest against the greenback since July."I would not step in front of this speeding train as long as the US growth exceptionalism story continues,” said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US Inc.The dollar’s rally has been fuelled by speculation that Trump’s tariffs and tax cuts will fan inflation and add fuel to an economy the Federal Reserve has already been trying to restrain.That has caused traders to dial back expectations for how much the Fed will cut interest rates in the months ahead, driving up bond yields and giving overseas investors an incentive to shift money to the US."From max bullish on the dollar, we have transitioned to a moderate bullishness on the dollar,” said Alessio de Longis, a senior portfolio manager at Invesco. "We are slowly but steadily taking profits on our dollar overweights and going to a more neutral stance.”Deutsche Bank said that not all of Trump’s policies have been priced in and the dollar has more room to go up.A "maximalist” scenario where Trump enacts his most extreme policies is only 30% priced into financial markets, according to George Saravelos, global head of FX Research at Deutsche Bank.It’s no secret that Trump likes the dollar’s role as the world’s reserve asset, and the accompanying economic and geopolitical power. But he also wants a weak enough foreign-exchange rate to buoy the US manufacturing sector.The duelling forces may become a pillar of his administration’s economic agenda, and as Treasury chief, Scott Bessent would oversee US currency policy."The reserve currency can go up and down based on the market. I believe that if you have good economic policies, you’re naturally going to have a strong dollar,” Bessent said in interview published in Financial Times in October.At the same time, currency traders are betting that Trump’s policy agenda is about to jumpstart volatility in the $7.5tn-a-day foreign exchange market.After years of benign moves, a gauge of one-year volatility on the euro-dollar exchange rate surged after the election. Hedge funds are scooping up options contracts that pay out if currency swings increase and strategists have dramatically revised their currency forecasts.While it’s not yet clear how quickly Trump will implement policies such as trade tariffs that could cause significant pain to currencies like the euro, investors are pretty certain that unpredictability will be a major feature of his term in office.Investors are underestimating trade war risks under a Trump presidency, according to strategists at Bank of America who predict a 5% slide in emerging-market currencies over the first half of 2025, and a selloff in sovereign debt.Exchange rates do matter because depreciating currencies increase the cost of imported goods, stoking inflation as those expenses feed through to prices in grocery stores and factories.Meanwhile, there’s a higher likelihood that money will pour out of a nation with a weak currency in search of higher yields elsewhere — so-called capital flight — harming domestic investment and growth.
November 26, 2024 | 11:57 PM