Wall Street is betting the US dollar will make further gains after its recent storming rally, even hitting parity with the euro, in a challenge to President-elect Donald Trump’s stated desire for a weaker currency.
The dollar has soared 6.2 per cent since the start of October, its best quarter since the early stages of the Federal Reserve’s interest rate raising campaign in 2022, as markets began to expect the Republican candidate would win November’s election and implement his plans for trade tariffs and tax cuts.
More than half of all major banks surveyed by the Financial Times, including Goldman Sachs, Morgan Stanley and UBS, are forecasting the dollar will rise even further next year. Deutsche Bank expects it to reach parity against the euro in 2025, having already strengthened from $1.11 at the start of October to around $1.05.
As a result, many fund managers are dismissive of Trump’s chances of being able to weaken the US currency in order to help domestic industry, whatever his rhetoric may be.
The idea of a weaker currency under Trump is “a bit of a pie in the sky”, said Sonal Desai, chief investment officer at Franklin Templeton Fixed Income. “It just feels like there are a bunch of contradictory factors.
“Most of the policies that he’s talking about so far, which seem definitely to be front and centre, will actually be dollar positive — not dollar negative,” she added.
Trump has long held the view that a strong dollar puts undue pressure on the US economy, leading to speculation about whether the incoming administration will act to try to push it lower.
“We have a big currency problem,” Trump told Bloomberg Businessweek in July, pointing to the dollar’s strength against the Japanese yen and the Chinese yuan.
“That’s a tremendous burden on our companies that try and sell tractors and other things to other places outside of this country,” he added.
Trump’s affinity for a weaker dollar was on full display in his first term as president, when he railed against what he deemed unfair currency practices of other countries. His administration even officially labelled China a “currency manipulator” amid a trade war between the two countries.
However, his pro-growth agenda and proposed tax cuts — along with his plans for high tariffs on imports from countries including Mexico, Canada and China — are widely expected to stoke domestic inflation after he takes office next month. This could lead to the Fed keeping interest rates higher for longer, which in turn could attract more foreign capital into dollar assets.
“The Trump policies are definitively dollar positive,” said Ajay Rajadhyaksha, Barclays’ chair of global research. The bank expects the dollar to strengthen slightly to $1.04 against the euro by the end of next year.
That presents a conundrum for the incoming administration, say analysts and investors. The mechanics of any possible solutions — for instance reining in the government’s budget deficit or drawing up a so-called Mar-a-Lago accord in which the US pressures its trading partners into engineering a dollar devaluation — would be highly challenging and could risk tarnishing the dollar’s status as the global reserve currency, they say.
The next president cares about “the importance of the primacy of the dollar [and] he gets agitated when other countries talk about currencies other than the dollar for transactions”, said Eric Winograd, chief economist at AllianceBernstein.
“The clearest expression of the incoming administration is [for an investor] to be long dollars, and to position for appreciation for the dollar.”
Investors and strategists also largely poured cold water on the idea of a “Plaza Accord” style framework, referring to the deal clinched by the Reagan administration in 1985, which saw countries forge a multilateral agreement for foreign-exchange interventions that depreciated the dollar relative to other currencies.
Mark Sobel, a former Treasury official, said supporters of a so-called “Mar-a-Lago Accord” may have “woefully exaggerated perceptions about US leverage over China”, with buy-in from Beijing far from secured.
“The secret sauce of the Plaza Accord was that US rates were already coming down,” said Brad Setser, a fellow at the Council on Foreign Relations and a former Treasury official under President Obama. “The macroeconomic backdrop, with interest rate differentials that favour the dollar versus the euro and the yuan, isn’t conducive to a weak dollar.”
Franklin Templeton’s Desai said that while Trump could potentially lean on countries that are managing their exchange rate, he would not be able to control the dollar.
“It’s not clear to me that he can actually run around screaming about how the euro is too weak against the dollar,” said Desai. “It isn’t; but more importantly, it’s another currency where the central bank doesn’t control it.”
The greenback’s rally has shown signs of stalling in recent weeks, with the Dollar index currently trading at 106.8, below the more than 108 it hit late last month.
But while analysts highlight that much of the impact of Trump’s presidency has already been priced in by the market, few see this as a sign that the rally is over or that the Republican’s rhetoric could push the currency lower.
“He could try to jawbone the dollar,” said AllianceBernstein’s Winograd. “But at the end of the day, the fundamentals tend to win.”
