- Trump victory raises expectation of policy-induced inflation, forcing Fed to keep policy restrictive for longer.
- FOMC meets on Thursday with a 25 bps cut priced in.
- US economy continues to grow at or above trend.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, surged to a four-month high after former US President Donald Trump secured the necessary electoral votes to become the next US president.
The US Dollar Index trades above 105.00 on Wednesday, the highest level since early July, following a steep rise against most major peers. Trump’s victory has fueled expectations of his policies, including tax cuts, deficit spending and tariffs, which are anticipated to spur inflation and constrain the Federal Reserve (Fed) from implementing a more dovish monetary policy.
Daily digest market movers: US Dollar rising on Trumps victory
- Markets had anticipated the victory as the US Dollar, UST yields, and US equity futures rose throughout the night, supported by the so-called “Trump Trade”.
- This implies more inflation under a Trump presidency than otherwise, forcing the Fed to keep policy restrictive for longer.
- Historically, the US Dollar has benefitted the most under a Republican president, a Republican Senate, and a Democratic House.
- The two-day FOMC meeting begins on Wednesday and should end with the expected 25 bps cut.
- Despite a distorted jobs data, the US economy is growing robustly and the labor market remains in solid shape.
- October ISM services PMI was stellar, reflecting robust consumption as we move into Q4.
DXY technical outlook: DXY breaks out to highest level since July
The DXY index witnessed a surge to multi-month highs, driven by bullish technical indicators. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) approach overbought territory, signaling a potential short-term correction. Wednesday’s significant price action suggests consolidation before further upward momentum
Key support levels lie at 104.50, 104.30 and 104.00, while resistance faces at 105.50 and 106.00.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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