The US dollar is heading for its most significant weekly decline in three months, as investors reevaluate the so-called “Trump trade” that has fueled its upward trajectory since the US presidential election. The greenback slipped by 0.2% on Friday, extending its weekly decline to 1.1%, reflecting a broad weakening against most of its Group-of-10 peers.
The yen led the gains against the dollar, while other major currencies followed suit, leaving only one G10 currency underperforming against the greenback. Market participants appear cautious as uncertainty grows over the implications of President-elect Donald Trump’s economic and trade policies.
After an eight-week rally driven by optimism over Trump’s pro-business promises, including tax cuts, deregulation, and infrastructure spending, the dollar’s momentum has faltered. Concerns have risen that some of Trump’s policies might negatively impact the US economy or fail to materialize in the manner markets have anticipated.
Mingze Wu, a currency trader at StoneX Financial in Singapore, explained the market’s current predicament:
“The market is still trying to find the narrative for the US dollar. We expect sideways volatility now before Trump’s inauguration in January, where we will then have a clearer US dollar direction once he announces his policies.”
The Citigroup Inc. index tracking dollar positioning among currency funds soared to its highest level since August 2023 earlier this week. This suggests that long positions on the dollar may be overextended, contributing to the current pullback.
Adding to market unease, President-elect Trump’s frequent and unpredictable social media posts have started to influence financial sentiment. While his proposed policies initially fueled optimism, the lack of clarity surrounding their execution has cast a shadow over the “Trump trade.”
Investors have grown increasingly wary that Trump’s rhetoric on trade protectionism and his potential for diplomatic tensions with key economic partners might outweigh the benefits of his promised fiscal stimulus. Such uncertainty has led many to reassess their positions on the dollar, favoring safer bets like the yen.
Among G10 currencies, the yen emerged as the standout performer this week, rallying significantly against the greenback. Analysts attribute this to the yen’s traditional status as a safe-haven currency, which gains appeal during periods of heightened global uncertainty.
The Japanese currency’s strength underscores a shift in sentiment, with investors seemingly hedging against potential volatility in US markets. Other major currencies, including the euro and the pound, also posted gains against the dollar, signaling a broader skepticism about the dollar’s near-term prospects.
The upcoming inauguration of Donald Trump on January 20 is expected to serve as a pivotal moment for the dollar. Markets are likely to remain in a state of flux until then, as traders await concrete details of the incoming administration’s policies.
For now, the market appears to be in a holding pattern, marked by what Wu described as “sideways volatility.” This environment reflects a tug-of-war between optimism over potential economic growth and fears of policy missteps or global instability.
The dollar’s recent pullback is not solely tied to US-specific factors. Global economic conditions, including improving data from the eurozone and steady performance in Asian economies, have also bolstered competing currencies. Additionally, central banks worldwide have adopted varying stances, creating a more competitive environment for the dollar.
Domestically, Federal Reserve policy has played a role. While the Fed raised interest rates in December, as widely expected, its outlook for 2024 appears more measured. Chair Jerome Powell’s comments on inflation dynamics and the pace of rate hikes have tempered expectations of aggressive monetary tightening, further weighing on the dollar.
The rally in the US dollar through much of 2023 was supported by heavy investor positioning. Hedge funds and other institutional players had placed significant bets on the greenback, banking on Trump’s economic agenda to fuel growth.
However, the unwinding of these positions this week has amplified the dollar’s decline. Analysts warn that overly crowded trades can lead to sharp reversals when sentiment shifts, as seen in the past week.
- Clarity on Trump’s Policies: Investors are eagerly awaiting detailed plans on fiscal stimulus, tax reforms, and trade policies.
- Federal Reserve’s Stance: Any signals regarding the pace of future rate hikes will be closely monitored.
- Global Economic Conditions: Developments in other major economies, including China and the eurozone, will continue to influence the dollar’s performance.
- While short-term volatility is likely, many analysts maintain a cautiously optimistic view of the dollar over the medium to long term, provided Trump’s policies align with market expectations.
