Dollar set to extend Trump rally, says Wall Street

Wall Street is betting the US dollar will make further gains after its recent storming rally, even hitting parity with the euro, in a test to President-elect Donald Trump’s stated desire for a weaker liquid assets.

The dollar has soared 6.1 per cent since the commence of October, its best quarter since the early stages of the Federal safety net’s gain rate raising campaign in 2022, as markets began to expect the Republican candidate would triumph November’s election and implement his plans for trade tariffs and levy cuts.

More than half of all major banks surveyed by the budgetary Times, including Goldman Sachs, Morgan Stanley and UBS, are forecasting the dollar will rise even further next year. Deutsche financial institution expects it to reach parity against the euro in 2025, having already strengthened from $1.11 at the commence of October to less than $1.05.

As a outcome, many pool managers are dismissive of Trump’s chances of being able to weaken the US liquid assets in order to assist domestic industry, whatever his rhetoric may be.

The concept of a weaker liquid assets under Trump is “a bit of a pie in the sky”, said Sonal Desai, chief resource officer at Franklin Templeton predictable returns. “It just feels like there are a bunch of contradictory factors.

“Most of the policies that he’s talking about so far, which seem definitely to be front and centre, will actually be dollar positive — not dollar negative,” she added.

Trump has long held the view that a powerful dollar puts undue pressure on the American economy, leading to uncertainty-taking about whether the incoming administration will act to try to push it lower.

“We have a large liquid assets issue,” Trump told Bloomberg Businessweek in July, pointing to the dollar’s strength against the Japanese yen and the Chinese yuan.

“That’s a tremendous burden on our companies that try and sell tractors and other things to other places outside of this country,” he added.

Trump’s affinity for a weaker dollar was on packed display in his first term as president, when he railed against what he deemed unfair liquid assets practices of other countries. His administration even officially labelled China a “liquid assets manipulator” amid a trade war between the two countries.

However, his pro-growth agenda and proposed levy cuts — along with his plans for high tariffs on imports from countries including Mexico, Canada and China — are widely expected to stoke domestic expense boost after he takes office next month. This could navigator to the Fed keeping gain rates higher for longer, which in turn could attract more foreign pool into dollar assets.

“The Trump policies are definitively dollar positive,” said Ajay Rajadhyaksha, Barclays’ chair of global research. The financial institution expects the dollar to strengthen slightly to $1.04 against the euro by the complete of next year.

That presents a conundrum for the incoming administration, declare analysts and investors. The mechanics of any feasible solutions — for instance reining in the government’s budgetary schedule deficit or drawing up a so-called Mar-a-Lago accord in which the US pressures its buying and selling partners into engineering a dollar devaluation — would be highly challenging and could uncertainty tarnishing the dollar’s position as the global safety net liquid assets, they declare.

The next president cares about “the importance of the primacy of the dollar [and] he gets agitated when other countries talk about currencies other than the dollar for transactions”, said Eric Winograd, chief economist at AllianceBernstein.

“The clearest expression of the incoming administration is [for an investor] to be long dollars, and to position for boost in worth for the dollar.”

Investors and strategists also largely poured cold water on the concept of a “Plaza Accord” style framework, referring to the deal clinched by the Reagan administration in 1985, which saw countries forge a multilateral agreement for foreign-trade interventions that depreciated the dollar relative to other currencies.

Mark Sobel, a former Treasury official, said supporters of a so-called “Mar-a-Lago Accord” may have “woefully exaggerated perceptions about US debt over China”, with buy-in from Beijing far from secured.

“The secret sauce of the Plaza Accord was that US rates were already coming down,” said Brad Setser, a fellow at the Council on Foreign Relations and a former Treasury official under President Obama. “The macroeconomic backdrop, with gain rate differentials that favour the dollar versus the euro and the yuan, isn’t conducive to a frail dollar.”

Franklin Templeton’s Desai said that while Trump could potentially lean on countries that are managing their trade rate, he would not be able to control the dollar.

“It’s not obvious to me that he can actually run around screaming about how the euro is too frail against the dollar,” said Desai. “It isn’t; but more importantly, it’s another liquid assets where the central financial institution doesn’t control it.”

The greenback’s rally has shown signs of stalling in recent weeks, with the Dollar index currently buying and selling at 106.8, below the more than 108 it hit late last month.

But while analysts highlight that much of the impact of Trump’s presidency has already been priced in by the economy, few view this as a sign that the rally is over or that the Republican’s rhetoric could push the liquid assets lower.

“He could try to jawbone the dollar,” said AllianceBernstein’s Winograd. “But at the complete of the day, the fundamentals tend to triumph.”