Wall Street is betting that the dollar’s recent surge will push it higher until it reaches parity with the euro, countering President-elect Donald Trump’s stated desire for a weaker currency.
The dollar has risen 6.2% since early October, as markets began to build expectations that Republican candidates would win the November election and implement their trade tariff plans, marking the beginning of the Fed’s 2022 interest rate hike campaign. It was the best quarter since the 1990s. And tax cuts.
More than half of the big banks surveyed by the Financial Times, including Goldman Sachs, Morgan Stanley and UBS, expect the dollar to strengthen further next year. Deutsche Bank says the euro has already appreciated to about $1.05 from $1.11 at the beginning of October, and expects it to reach parity against the euro in 2025.
As a result, many fund managers are dismissing the possibility that the U.S. currency could be weakened to support domestic industry, no matter what Trump’s rhetoric.
Sonal Desai, chief investment officer at Franklin Templeton Fixed Income, said the idea of a weaker currency under the Trump administration is “a piece of cake.” “I feel like there are a lot of conflicting elements.
He added: “Most of the policies he’s been talking about so far, which certainly seem central, are actually going to be dollar-positive, not dollar-negative.”
President Trump has long said a strong dollar would put undue pressure on the U.S. economy, leading to speculation about whether the next administration will act to weaken the dollar.
“We have a big problem with the currency,” President Trump told Bloomberg Businessweek in July, pointing to the dollar’s strength against the Japanese yen and Chinese yuan.
“This is a huge burden on our companies who are trying to sell tractors and other things abroad,” he added.
President Trump’s desire for a weaker dollar was on full display during his first term as president, when he railed against what he viewed as unfair currency practices in other countries. The administration even officially labeled China a “currency manipulator” amid a trade war between the two countries.
But his pro-growth policies and proposed tax cuts, along with plans to impose higher tariffs on imports from countries including Mexico, Canada and China, are widely expected to stimulate domestic inflation after he takes office next month. This could lead to the Fed keeping interest rates high for an extended period of time, which could attract more foreign capital into dollar assets.
“President Trump’s policies are definitely dollar positive,” said Ajay Rajadhyaksha, chairman of global research at Barclays. The bank expects the dollar to appreciate slightly against the euro to $1.04 by the end of next year.
This poses a challenge for the next administration, analysts and investors say. Possible solution mechanisms, such as reining in government budget deficits or creating the so-called Mar-a-Lago Agreement, in which the United States pressures trading partners to devalue the dollar, are extremely difficult; There is a risk of reputational damage. They say the dollar has established itself as the world’s reserve currency.
Eric Winograd, chief economist at AllianceBernstein, said the president-elect is “concerned about the importance of the dollar’s dominance and becomes furious when other countries talk about currencies other than the dollar in their transactions.”
“The clearest expression from the incoming administration is (for investors) to go long the dollar and position for a stronger dollar.”
Investors and strategists also pointed to the deal signed by the Reagan administration in 1985 and cast a heavy spotlight on the idea of a “Plaza Accord”-style framework. Under this agreement, each country entered into a multilateral agreement to intervene in foreign exchange rates, causing the dollar to depreciate in relative terms. other currencies.
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Mark Sobel, a former Treasury official, said supporters of the so-called Mar-a-Lago agreement may have a “grossly exaggerated perception of U.S. influence in China” and that Beijing’s He said buy-in was never secured.
“The secret to the Plaza Accord was that U.S. interest rates were already lower,” said Brad Setzer, a fellow at the Council on Foreign Relations and a former Treasury official in President Obama’s administration. “The macroeconomic backdrop, with a favorable interest rate differential for the dollar versus the euro and renminbi, is not conducive to a weaker dollar.”
Franklin Templeton’s Mr. Desai said Mr. Trump could rely on countries controlling their exchange rates, but he would not be able to control the dollar.
“I don’t know if he can actually run around screaming about how the euro is too cheap against the dollar,” Desai said. “No, but more importantly, this is another currency that is not controlled by a central bank.”
The dollar’s rise has shown signs of stalling in recent weeks, with the dollar index currently at 106.8, below the 108-plus mark late last month.
But analysts stress that many of the effects of Trump’s inauguration have already been priced into the market, which could be a sign that the bull run is over or that Republican rhetoric could push the currency lower. Very few people see it.
“He may try to water down the dollar,” said AllianceBernstein’s Winograd. “But at the end of the day, fundamentals tend to win.”