Currency analyst and trader Kathy Lien shared this video where she discusses the reasons behind the current climb in dollar strength. She lists five major reasons. First, the US economy is doing well when compared to the Eurozone and Asia. Yields are increasing and attracting more investors.
Second, the Trump return to the White House signals aggressive economic moves in terms of tax cuts and tariff policies.
Third, inflation and Fed policy can strengthen the dollar. Trump policies, particularly tariff policies, are inflationary. Rate cuts are being delayed which aids the increase in dollar value and higher yields.
Fourth, US yields are on the rise. The yields on US Treasuries are higher than bond yields in Europe and Japan. This incentivizes moving money into US assets like Treasuries and equities.
Fifth, the dollar has safe haven status. Global turmoil sends investors to the U.S. for safety.
The downside of dollar strength? A strong dollar makes US exports more expensive. In addition, foreign nations will have to find more dollars to pay back US dollar denominated debt.
Presumptive president-elect Donald Trump would like to see prices increase for goods imported from foreign economies, particularly China. Mr. Trump has proposed an increase in tariffs on imported goods as a means for meeting this agenda. By placing tariffs on imports, he hopes American consumers will purchase goods produced domestically.
A USA Today report notes that while some American manufacturers expect to hire more domestic workers with a probable increase in demand for domestically manufactured products, some economists also expect a pickup in prices for these goods. Increased prices resulting from the imposition of higher tariffs may get passed on to consumers.
I would add that with a potential increase in price levels in America and the buildout of additional infrastructure needed to meet potential increases in domestic demand, that foreign investors send more dollars to the US because of increases in yields.
I have to ask myself, what does Donald Trump really want from foreign nations? Is his threat to raise tariff rates a bargaining chip? Also, does he want his party to bear a mid-term loss in 2026 should his tariff and currency policy put upward pressure on consumer prices? Politically, that scenario would give the Democrats the opportunity to offer a narrative that not only criticizes Trump policy, but offers an alternative economic program. Based on their performances in 2016 and 2024, I doubt that Democrats will offer a better policy package.
But to Trump’s manufacturing agenda, a weaker dollar policy is better for exports. A strong dollar policy, which is the current preference for the U.S. government combined with higher tariffs may have a negative impact not only on poor working Americans, but on the overall productivity of the economy as global demand for U.S. goods would continue to take a negative hit.
As for the impact on currency movement, say next year, I do not know.
Alton Drew
17 November 2024
Foreign exchange rates per x-rates.com. (12:22 pm EST, 17 November 2024)
EUR/USD=1.0538
USD/JPY=154.3338
AUD/USD=0.6462
Administered rates per the Board of Governors-Federal Reserve System.
Effective Federal Funds Rate: 4.58%
Interest on Reserve Balances: 4.65%
Discount Window: 4.75%
Treasury rates per the Board of Governors-Federal Reserve System.
2-yr Treasuries: 4.34%
10-yr Treasuries: 4.43%
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