He global dollar rose this Thursday leveraged by the distance from aggressive cuts in the rates of the United States Federal Reserve (Fed) and before the imminent return of donald trump to the White Housewhich has led investors to consider a long period of strength for the US currency.
He dollar indexwhich measures the greenback against six similar currencies, has risen nearly 10% from its late September lows to a high in more than two years, Reuters reported.
The dutywith their potentially inflationary pressures, could prompt the Fed to be cautious about rate cuts even as trade tensions darken the outlook for global economic growth and make more investors look for the dollar as a safe haven.
The longer U.S. interest rates remain higher than yields in other developed economies, the greater the dollar’s appeal to investors.
Although Trump has often complained that the excessive strength of the dollar affects the competitiveness of American exports and hurts industry and employment there, the market often sees its policies as driving it.
Scott Bessentnominated by the Republican president to lead the Treasury Departmentsaid Wednesday that he will ensure that the dollar remains the world’s reserve currency.
Traders in currency futures markets appear positioned for further dollar strength, with projections that it will rise to a nearly six-year high, according to data from the Commodity Futures Trading Commission.
Against a weighted basket of several currencies, the dollar is more overvalued than it has been in the last 55 years, according to BofA Global Research.
Typically, such a significant rally would attract dollar bears anticipating a reversal, but few investors currently believe it is prudent to challenge the currency’s rise. “We continue to view the dollar as fundamentally overvalued, but, at least in the near term, it is difficult to find catalysts that could cause it to weaken,” said Brian Rose, senior U.S. economist at UBS Global Wealth Managementto Reuters.
Trump’s inauguration stops betting
According to investors, Donald Trump’s presidential inauguration on Monday is one of the main reasons holding back dollar bears awaiting clarity on his tariff policy.
The market got a taste of how sensitive the dollar can be to tariff-related news on Jan. 6, when the dollar index fell about 1% following a report from The Washington Post suggesting that Trump’s advisers were considering plans limited tariffs. He quickly recovered after the president-elect denied the story.
“People are waiting for at least those major policy announcements to be made to close positions,” said Thierry Wizman, global currency and interest rates strategist at Macquarie.
On Monday, the strategists of Goldman Sachswhich forecast the dollar would rise another 5% this year, said it could rise even further if the U.S. economy continues to outperform the Fed despite higher tariffs, and markets start pricing in possible rate hikes instead of cuts. .
The Fed and the rate dilemma in the new Trump era
Trump’s government plan, which includes aggressive tariffs and deportation of some immigrantshas already raised concerns among policymakers about inflation, minutes from the Federal Reserve’s December meeting show. “There has been a pretty obvious shift in the Fed’s tone toward a more hawkish stance,” said Macquarie’s Wizman.
The situation of the US treasury bonds and its performance is also under attention. “The United States is outperforming both in terms of high returns and better growth,” said Aaron Hurd, senior currency portfolio manager at State Street Global Advisors.
Treasury yields have risen in recent weeks, with the US 10-year bond yield rising to a 14-month high on strong economic data and expectations that the Federal Reserve could be ending the rate cuts as it prepares for the implementation of Trump policies.
While Hurd is positioned for dollar weakness in the three- to five-year time frame, he doesn’t rule out further near-term gains for the U.S. currency.
Source: Ambito

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