Karen Brettell
(Reuters) – The dollar strengthened on Wednesday to post its biggest one-day gain since March 2020, following Republican Donald Trump’s victory in the U.S. presidential election, while the euro and Mexican peso suffered the biggest losses from potential modern tariffs in U.S. regions.
Trump defeated Democratic Vice President Kamala Harris and reclaimed the White House, while Republicans also won a majority in the US Senate. Control of the House of Representatives remains in question, with Republicans currently holding a slim majority.
A full Republican takeover would allow the party to make larger policy changes, which in turn would likely result in larger currency moves.
Trump’s policies of curbing illegal immigration, modern tariffs, lower taxes and deregulation could boost economic growth and inflation and limit the Federal Reserve’s ability to lower interest rates.
“This could push inflation higher and force the Fed onto a slower monetary easing path that will be supportive for the dollar,” said Nikos Tzabouras, senior market specialist at trading platform Tradu.
The euro zone, Mexico, China and Canada are seen as at risk of potential modern tariffs that could hurt economic growth in the regions and widen the interest rate differential with the United States.
Nick Wood, director of execution at MillTechFX and Millennium Global, notes that Wednesday’s currency moves were on track, with volumes for currency pairs generally around 25-30% higher than usual.
This could have been helped by investors taking relatively delicate positions before the elections.
“It looks like the market elements have actually been quite risk-light, so they can be a little more patient when getting into positions rather than feeling like you’re on the wrong side of something and about to exit at high speed,” he said.
Meanwhile, a factor complicating the dollar’s long-term prospects may be Trump’s preference for the tender US currency.
“Both this year and during his previous time in the White House, he has fundamentally questioned the long-held mantra of a strong dollar as he prefers a weaker currency to help exports and U.S. economic activity,” Tzabouras said.
“He also called for lower interest rates, which could pose a long-term headwind for the dollar as these policies begin to take shape.”
It recently rose 1.72% to 105.17 and hit 105.44, the highest since July 3. The euro fell 1.91% to $1.0720 and hit its lowest level since June 27 at $1.0683.
The dollar rose 1.60% to 154.02 Japanese yen to 154.48, the highest since July 30.
The Japanese yen may now be approaching levels that prompted officials to intervene and shore up the currency earlier this year.
Japan’s Chief Cabinet Secretary Yoshimasa Hayashi said on Wednesday that the government intends to closely monitor currency market movements, including speculative movements, with a particular sense of urgency.
Trump also expressed favorable views on cryptocurrencies, which helped push bitcoin to a record high of $75,389. It was recently up 7.3% at $74,181.
The Fed is expected to cut interest rates by 25 basis points at the end of its two-day meeting on Thursday, and investors will also be watching for modern indications on whether the U.S. central bank may pause cuts in December.
The much stronger-than-expected September jobs report prompted investors to temper expectations about how many times the Fed is likely to cut interest rates. A much weaker-than-expected report for October has cast some doubt on that view, although the data has been overshadowed by the impact of recent hurricanes and labor strikes.
According to CME Group’s Fed Watch Tool, investors now price in a 65% chance that the Fed will also cut interest rates in December, down from 77% on Tuesday.
The Bank of England is expected to cut interest rates by 25 basis points on Thursday, the Riksbank will cut rates by 50 basis points and Norges Bank will remain unchanged.
