By Saqib Iqbal Ahmed

Dollar Strength Amid Trump’s Policies

NEW YORK (Reuters) – U.S. President-elect Donald Trump’s imminent return to the White House and fading hopes for aggressive interest rate cuts have driven the dollar to multi-year highs. Investors expect this strength to continue, supported by the new administration’s pro-growth and inflationary policies.

The dollar index, which measures the greenback’s strength against six major currencies, has surged nearly 10% from its late-September lows to a more than two-year high.

Much of these gains have occurred since Trump’s victory in the November election, as investors prepared portfolios for the new administration’s trade and tariff policies expected to support the dollar in the near term while pressuring other economies and currencies.

Tariffs, with their potentially inflationary pressures, could make the Fed cautious with rate cuts, even as global trade tensions darken economic growth outlooks and drive investors towards the safe-haven dollar.

The longer U.S. interest rates remain higher than yields in other developed economies, the greater the appeal of the dollar for investors.

While Trump has often complained that the dollar’s excessive strength hurts U.S. export competitiveness, his policies are viewed as boosting the dollar. During his first term, the dollar rallied about 13% from February 2018 to February 2020, notably after implementing tariffs against several countries.

Scott Bessent, Trump’s pick for Treasury Department head, stated he would ensure the dollar remains the world’s reserve currency.

Traders in currency futures markets are positioned for continued dollar strength, with net bets on the dollar rising to a near six-year high of $34.28, according to data from the Commodity Futures Trading Commission.

Against a weighted basket of several currencies, the dollar is the most overvalued it has been in 55 years, according to BofA Global Research.

Typically, such significant rallies attract dollar bears anticipating reversals. However, few investors currently believe it is prudent to bet against the rising dollar. Brian Rose, senior U.S. economist at UBS Global Wealth Management, stated, “We continue to see the dollar as fundamentally overvalued, but it’s hard to come up with catalysts that would make it weaken.”

The anticipated presidential inauguration on Monday is one reason for dollar bears to hold back, as the dollar has rallied on broad tariff expectations with many details still unclear.

“We don’t know how strong they’re going to be, how intense, how broad, how high,” said John Velis of BNY Markets. Clarity on tariffs could further boost the dollar, making it risky to short the currency, even at these levels.

Investors learned how sensitive the dollar can be to tariff news. On Jan. 6, the dollar fell about 1% against a currency basket following a report suggesting limited tariff plans, but rebounded after Trump denied it.

As long as tariff uncertainties remain, investors will find it hard to abandon their bullish dollar bets. Thierry Wizman of Macquarie added, “I think people are waiting for those important policy announcements to get out of the way before closing positions.”

Goldman Sachs strategists, forecasting a further 5% rise in the dollar this year, suggest it could rally even more if the U.S. economy outperforms amid higher tariffs, shifting the market focus from rate cuts to potential Fed rate hikes.

Concerns about inflation prompted by Trump’s campaign of aggressive tariffs and deportations were reflected in Fed meeting minutes from last month. Macquarie’s Wizman acknowledged a notable shift towards hawkishness from the Fed.

Meanwhile, the dollar is supported by positive catalysts, including improved U.S. growth outlooks and reduced expectations for Fed rate cuts. Recent data revealed unexpected job growth in December, reinforcing the Fed’s cautious stance on rate cuts, despite inflation signs signaling underlying price pressures easing, leading markets to bet on a June rate cut.

Aaron Hurd, senior portfolio manager at State Street Global Advisors, noted that the U.S. is outperforming with high yields and better growth, with Treasury yields rising and the U.S. 10-year yield hitting a 14-month high.

While Hurd anticipates dollar weakness in the medium term, he acknowledges potential near-term gains, stating, “There is still a little bit of room for dollar strength here.”