In financial markets on Wednesday, the U.S. dollar held close to a six-and-a-half-month peak against other major global currencies, buoyed by investors’ anticipation of the economic policies expected under President-elect Donald Trump’s administration. Bitcoin, meanwhile, maintained a strong position just below record highs, signaling investor interest in cryptocurrency amidst anticipated changes in U.S. financial policy. The evolving economic landscape is also prompting investor caution, especially ahead of key U.S. inflation data set to release later in the day.
With Trump’s victory in the U.S. presidential election last week, markets are responding robustly. Expectations of Trump’s economic policies, including tax cuts and trade tariffs, have fueled the dollar’s rise and led investors to reassess their outlook for U.S. inflation and interest rates. While these “Trump trades” have lifted Treasury yields and fueled speculation about Federal Reserve policy adjustments, uncertainty remains, and markets are closely watching developments to determine the administration’s impact on global financial dynamics.
The U.S. dollar has been one of the prime beneficiaries of what investors are dubbing “Trump trades.” These trades involve asset repositioning in anticipation of Trump’s policies, which are expected to focus on reduced taxes and protective trade tariffs. Investors are betting that such policies could drive up inflation, potentially forcing the Federal Reserve to moderate its previous intentions to lower interest rates further. As of Wednesday morning, the U.S. dollar index, which measures the dollar’s performance against a basket of six major currencies, was up 0.02% to 106.01, just short of the previous day’s high of 106.17, its highest since May.
According to financial analysts, Trump’s plans to reduce taxes and tighten trade policies could spur domestic economic growth but might also lead to higher prices. With Republicans projected to hold control over both chambers of Congress, Trump is positioned to advance his agenda with relative ease when he takes office in January. Lower taxes, combined with potentially restrictive trade policies, could stimulate inflation, prompting the Fed to reassess its interest rate strategy.
“The market response has been swift, with investors reallocating into dollar assets and betting on rising yields,” explained Charu Chanana, Chief Investment Strategist at Saxo Bank. “Focus is likely to shift back to inflation and Fed policy later in the week, but whether that brings an unwinding of Trump trades remains to be seen.”
U.S. Treasury yields have experienced an uptick as well, as investors weigh the possibility that inflation will accelerate under Trump’s administration. The increased yields reflect expectations that the Federal Reserve may reduce the extent of planned rate cuts if inflation does indeed pick up, signaling potential caution from the Fed amid this shifting economic climate.
Currently, markets estimate a 60% likelihood of a quarter-basis-point cut in December, down from the previous month’s 84% estimate, according to data from CME Group’s FedWatch Tool. These probabilities indicate a softening in the anticipated Fed rate cut pace, driven in part by the inflationary pressures of Trump’s proposed policies. Adding to the speculation, Federal Reserve officials are hinting at potential restraint, noting that the Fed may not be in a rush to cut rates further if inflation takes a sharper upward turn. Recent comments from Fed members, including Minneapolis Fed President Neel Kashkari and Richmond Fed President Thomas Barkin, reflect a cautious tone as they evaluate the need for future rate adjustments.
In a parallel development in the cryptocurrency market, Bitcoin remained just below record highs, with a slight decrease of 0.23%, trading at $87,105.05. The cryptocurrency reached an all-time high of $89,998 on Tuesday as optimism spread among crypto investors following Trump’s pledge to make the U.S. a global “crypto capital.”
Trump’s pro-crypto stance has bolstered confidence among Bitcoin investors, many of whom view the cryptocurrency as an alternative asset class that can hedge against potential inflation. As the incoming administration signals openness to digital currencies, institutional interest in Bitcoin has increased, with many investors viewing it as a store of value and a high-return investment in today’s turbulent economic climate.
“Trump’s vow to establish the U.S. as the crypto capital is not only symbolic; it could drive actual policy changes in favor of digital currency adoption and regulation,” noted an analyst at a leading cryptocurrency research firm. “This would not only boost Bitcoin but also strengthen the entire crypto ecosystem.”
Investors are anticipating the October Consumer Price Index (CPI) report, which is set for release later on Wednesday, as a major data point that could influence market sentiment. The core CPI, excluding volatile food and energy prices, is expected to increase by 0.3%. Should the data surpass these expectations, it could further reduce the likelihood of a December Fed rate cut and prompt additional dollar gains.
If inflation data show an even more pronounced rise, it could trigger further adjustments in the dollar and Treasury yields, with potential ripple effects across global markets. Later this week, investors will also be watching closely for statements from Fed Chair Jerome Powell and additional economic indicators, including the Producer Price Index (PPI) on Thursday and retail sales data on Friday.
Across the Atlantic, the euro remained near its one-year low against the dollar, impacted by political uncertainty in Germany. As the largest economy in the eurozone, Germany’s upcoming elections in February 2023 will carry significant implications for the region. Recent political instability, following the collapse of Chancellor Olaf Scholz’s coalition government, has added pressure on the euro, which was down 0.05% on Wednesday at $1.061875.
Moreover, markets are assessing the potential for new tariffs on European imports into the U.S. under Trump’s administration, adding another layer of pressure on the euro. The combination of political instability and trade worries has left the euro vulnerable to further depreciation, especially as the dollar’s strength persists amid Trump-fueled optimism.
The Japanese yen also encountered headwinds as the dollar strengthened. The dollar rose 0.17% against the yen to 154.88, close to its July high. Japan’s latest inflation data revealed an acceleration in wholesale prices for October, driven partly by a weakened yen that increased import costs. These inflationary pressures are likely to complicate the Bank of Japan’s considerations about when to raise interest rates, as it balances inflation control with sustaining economic growth.
In the Pacific region, the Australian dollar came under mild pressure, trading 0.02% lower at $0.6531. Australia’s latest wage data show a deceleration in annual wage growth, which reached its slowest pace since 2022’s end. Factors such as an increase in labor force participation and a gradual easing in inflation have contributed to slower wage growth, providing some support for potential future interest rate cuts by the Reserve Bank of Australia (RBA).
