NEW YORK – As the polls and prediction markets showed Donald Trump looking more likely to return to the White House, the value of the dollar began to rise. When the result became clear, it soared.
The day after the election, the dollar rose the most it had in years against a basket of other major currencies. And it has continued to rise, hitting a fresh high for the year on Nov 13, as economists and traders considered the policies proposed by the President-elect and revised their forecasts for the world’s dominant currency.
Such strength is a sharp shift from three months of sustained weakening, with the dollar hitting its low point for the year at the end of September.
Sharp moves in the value of the dollar can have a destabilising effect on the global economy, because the US currency is on one side of nearly 90 per cent of all foreign exchange transactions. Essential commodities, like oil, are typically priced in dollars.
A stronger dollar makes it cheaper for Americans to buy foreign goods and to travel abroad, but US companies that export products may become less competitive. Outside the United States, a strengthening dollar stokes inflation in countries with weaker currencies and makes it harder to pay debts denominated in dollars, weighing on the global economy.
Why does the dollar keep getting stronger?
The recent rise may seem curious, because Trump has often said that, for the sake of US exports, he would prefer to see the dollar weaken. But his plans to impose tariffs on imports and cut taxes, among other actions, are expected by most economists to do the opposite.
Traders appear to agree: The broad-based dollar index is up about 3 per cent since Election Day, a big move for that market over such a short period. Almost every major currency has lost value against the dollar in 2024, with pronounced declines in recent weeks. The Japanese yen is down about 9 per cent and the Mexican peso more than 17 per cent against the dollar since the start of the year.
The benefits of a stronger dollar, in terms of buying power for American households and businesses, erode if accompanied by rising interest rates and higher inflation, as was the case during a bout of dollar strength in 2022. Some analysts and investors, who think the dollar could get even stronger in the coming months, see this combination as possible again, which would likely leave many Americans feeling comparatively poorer.
Much depends on whether the Trump administration’s campaign pledges turn into reality. “Trump is the big dollar driver,” said Standard Chartered foreign exchange analyst Steven Englander.
Sweeping tariffs, a signature campaign promise by Trump, would in effect impose taxes on all imported goods. Proponents say that by making imports more expensive, tariffs promote domestic alternatives.
However, for car companies that build or buy parts from overseas or clothing firms with factories scattered around the world, moving production to the US is costly and would take time.
That’s why the immediate effect of tariffs is generally to make things more expensive for businesses and consumers, reducing demand for imports priced in foreign currencies, which tends to push up the value of the dollar.
Rising prices (that is, faster inflation) can prompt the Federal Reserve to raise interest rates. And higher interest rates attract investment from investors seeking higher returns, further increasing the demand for dollars.
Mr Matt Bush, US economist at Guggenheim Investments, said the dollar’s strength reflected “US exceptionalism” in terms of its stronger economy as well as the potential for higher inflation.