The Dollar’s Rally: A Down Payment on Trump’s Election Victory
The U.S. dollar is experiencing a significant rally as market sentiment shifts toward the possibility of a Donald Trump victory in the upcoming presidential election on November 5. This trend has been highlighted by Thierry Wizman, an FX and rates strategist at Macquarie, who has observed that the strengthening dollar correlates with increasing confidence among investors regarding Trump’s chances against Democratic nominee Kamala Harris. With the ICE U.S. Dollar Index (DXY)—a measure that compares the dollar against a basket of six major currencies—surging by 2.5% in October alone, this shift points to a notable reversal in trends for 2023.
Growing Probability of a Trump Victory
Wizman’s analysis shows that not only has the dollar strengthened, but betting markets have also reflected a rising probability of Trump’s success, increasing from an approximate even chance in late September to 55% in October according to prediction market Polymarket. As the election draws nearer, the upward move in the dollar’s value signifies a strategic play by investors positioning themselves in anticipation of potential Trump policies.
Inflationary Policies and Their Impact
According to Wizman, Trump’s potential economic agenda—characterized by higher tariffs, reduced immigration, and lower taxes—is likely to exert inflationary pressures. This scenario would compel the Federal Reserve to adopt a more hawkish stance on monetary policy, projecting a trajectory of increased real and nominal interest rates through 2025-26. As Wizman aptly points out, Trump’s policies could be classified as “strong dollar policies” given that a robust dollar can counteract the adverse effects of inflation.
The Unexpected Strong-Dollar Advocate
This concept of Trump as a strong-dollar advocate marks a significant departure from his previous complaints about foreign currencies that he believed undermined U.S. competitiveness during his first presidential term. Wizman noted that Trump’s recent inclination to embrace a strong dollar may stem from his understanding that inflation could be detrimental to his political standing, particularly as it weakens purchasing power for American consumers.
The Implications of Higher Tariffs and Interest Rates
In a recent discourse, Trump suggested imposing hefty tariffs—up to 100%—on nations that stray from the dollar, reaffirming his commitment to maintaining the currency’s status as a reserve standard. This aggressive tariff strategy, aligned with his economic policies, presents a dual-edged sword. On one hand, it could bolster domestic industries; on the other, soaring tariffs risk escalating consumer prices, potentially leading to inflation. As Wizman summarized: the trajectory of interest rates would likely align with these inflationary policies, enhancing the attractiveness of U.S. assets in comparison to foreign investments, thus supporting dollar strength.
The Federal Reserve’s Role
Given the ongoing uncertainties surrounding the U.S. fiscal outlook, a backdrop of rising bond yields—which typically move inversely to price—could limit the flexibility of future administrations in pushing through expansive fiscal policies. Even with a significant rate cut of 50 basis points by the Fed in September, rising Treasury yields indicate ongoing market concerns about fiscal sustainability. If bond yields continue to climb, this could impede the plans of either a Trump or Harris administration.
The Betting Markets and Polls
Despite Trump’s growing edge in betting markets, polls indicate a tight race between him and Harris. The narrowing margins in key swing states provide a solid rationale for the current optimism surrounding Trump’s electoral prospects. Should Harris unexpectedly surge in popularity before November 5, Wizman cautions that the dollar could surrender a portion of its recent gains. In such a scenario, the euro, presently hovering around $1.09, could strengthen to $1.11 or $1.12.
Conclusion
In summary, the dollar’s current rally reflects a complex interplay of investor sentiment, potential economic policies, and a keen eye on the upcoming presidential election. Trump’s strategic positioning and focus on inflationary policies may define the trajectory of the dollar in the months ahead as markets prepare for what is widely viewed as a pivotal election. As Wizman aptly concludes, the shifts observed over the past two weeks may act as a “down payment” on the electoral outcomes investors are starting to favor.