The President-elect Donald Trump has made a significant promise to weaken the U.S. dollar in an effort to enhance the country's exports globally. However, a rather unexpected phenomenon has occurred since the Election Day. The U.S. dollar has actually appreciated by almost 3%, contrary to what his policies might suggest.
Why the U.S. Dollar is Gaining Strength
The U.S. dollar is getting stronger due to the fundamental forces of supply and demand. People, both within the country and around the world, have a growing appetite for dollars. They are actively buying dollars and, at the same time, selling other currencies as their demand for those currencies wanes.One crucial factor contributing to this is inflation. As Paul Ashworth, the chief U.S. economist at Capital Economics, pointed out, the October inflation data came in stronger than expected. When inflation persists, the Federal Reserve takes measures to combat it by keeping interest rates high. And when interest rates are high, investors can earn more money. This attracts them to hold dollars and seek the benefits of higher returns.Another aspect making the U.S. dollar look good is the relative performance of other currencies. In Canada, for instance, their economy is showing signs of slowing down. As a result, the Canadian dollar has weakened as the central bank has been more aggressive in cutting interest rates. This showcases how the strength of one currency is often influenced by the performance of others.Trump's Policies and Their Dollar Implications
Most of the policies that President-elect Trump has discussed, especially from an economic perspective, have a positive impact on the dollar. Despite his stated intention to weaken the dollar, his spending plans are likely to increase the deficit. This means the government will need to borrow more money, and investors are eager to get a share of these funds by holding dollars.Tariffs also play a significant role. As Eric Winograd, the chief economist at AllianceBernstein, explained, if tariffs are imposed, the U.S. will likely import less. With fewer goods being imported from foreign countries, there is less demand for foreign currencies to pay for those goods. Consequently, the demand for those currencies falls, and they weaken. This, in turn, leads to the appreciation of the U.S. dollar.Market Reactions and the Dollar's Upward Move
Markets are well aware of these factors and have already started to anticipate the implications. This anticipation has led to the U.S. dollar beginning its upward movement. Investors are responding to the potential economic changes and adjusting their portfolios accordingly. The dollar's strength is not just a short-term phenomenon but is likely to have a lasting impact on global financial markets.In conclusion, the U.S. dollar's current trajectory is a result of a complex interplay of various factors. While President-elect Trump's intentions may differ from the actual market movements, the economic realities are shaping the dollar's value. As the world continues to evolve, these dynamics will remain crucial in determining the future of the U.S. dollar and its role in the global economy.