Why is the US dollar going up: Dollar Surges on Trump’s return

Why is the US dollar going up, as President-elect Trump prepares to return to the White House, the dollar remains surprisingly strong.

Current Dollar Strength

US dollar holds firm, as President-elect Trump prepares to return to the White House, the dollar remains surprisingly strong. Earlier this week, the Federal Reserve's nominal trade-weighted dollar index hovered just below 130, marking the highest level since March 1973.

Measures of Dollar Strength

Other measures of dollar strength, such as the ICE dollar index, recently surpassed 110, reaching its highest level since November 2022. This index evaluates the dollar's value against major developed market competitors, with the euro having the largest weight.

Investor Perspectives

Macquarie's global market strategist Viktor Shvets emphasizes that for investors, the speed of the dollar's appreciation is more critical than its absolute level relative to other currencies. “No matter how you look at it, the dollar has reached a fairly high level,” Shvets said.

Rapid Appreciation Impact

The pace of the dollar's appreciation has been significant, rising 9% since election day and increasing 7.7% in the quarter ending last December. Such rapid fluctuations could have far-reaching effects on the global economy.

Effects on American Businesses

The most direct impact will likely be on the performance of American businesses. A team of analysts from Goldman Sachs identified sectors within the S&P 500 that are most vulnerable to a stronger dollar based on their overseas sales percentages. A stronger dollar reduces the dollar value of overseas revenues, increasing the likelihood that companies may struggle to meet Wall Street's sales and earnings targets.

Potential Consequences for US Stock Market

This situation could have serious implications for the US stock market, which is already displaying signs of weakness. According to Goldman Sachs, the most vulnerable sectors include information technology, materials, and energy stocks.

Management Reactions

In their analysis of earnings call transcripts, Goldman found that executives did not consider the strong dollar's impact seriously during the third quarter. However, the rapid rise of the dollar means that this impact could be more pronounced in the upcoming quarter.

Broader Economic Concerns

A stronger dollar may also create obstacles for overseas economies and financial markets. Investors have observed that international stocks, when measured in dollars, have significantly underperformed their US counterparts over the past year.

Pressure on Local Currencies

As the dollar strengthens, it places greater pressure on local currencies, potentially limiting the ability of other countries' monetary authorities to lower interest rates to stimulate domestic demand. For example, Brazilian authorities have spent $30 billion in foreign exchange reserves and raised rates to defend the depreciating Brazilian real.

Emerging Market Resilience
Emerging market economies are not as susceptible to the effects of a stronger dollar as they were in the past, thanks to stronger foreign exchange reserves and lower levels of external debt relative to GDP.

Potential Global Financial Issues
However, Shvets warns that a stronger dollar increases the likelihood of problems emerging in the global financial system, stating, “The dollar's dominance is so high that it determines global liquidity, global capital costs, and global demand.”

Outlook for the Dollar
Fortunately, Shvets and others believe that the dollar's strength may not persist. Factors contributing to the dollar's rise include the relative resilience of the US economy and high yields on US government bonds, which attract foreign investors.

Conclusion

While strong US economic data and potential inflationary policies under the Trump administration have bolstered the dollar, more aggressive tariffs could further strengthen it in the short term. However, UBS strategists anticipate that the dollar's performance in the first half of 2025 may differ significantly from the second half, potentially weakening later in the year.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.