The U.S. dollar surged past 155.60 yen on Wednesday, hitting levels unseen in nearly four months.
What Happened: Investors piled back into yen-dollar carry trades. The speculation is that the incoming Trump administration will aggressively hike tariffs on imports.
Economists expect the planned tariffs to reshape currency markets and stoke U.S. inflationary pressures.
The greenback’s strength against the yen in six of the past seven weeks reverses early August losses tied to weak U.S. jobs data. Bank of Japan interventions also triggered an abrupt unwind of yen-dollar carry trade positions.
Inflation Data As Expected, Dollar Momentum Unshaken
On Wednesday, the U.S. Consumer Price Index (CPI) report showed inflation accelerating to 2.6% year-over-year in October 2024, meeting economists’ expectations. Core CPI inflation, which excludes volatile food and energy prices, stood at 3.3% for the third straight month, also aligning with forecasts.
This in-line inflation data helped quell concerns that the Federal Reserve might consider an interest-rate pause in December. Instead, speculators are now heavily betting on a 25-basis-point rate cut. Market-implied probabilities are rising to over 80%, as per CME FedWatch.
Yet, even an in-line CPI report fueling rate-cut bets wasn't enough to hold back the dollar's momentum.
The Invesco DB USD Index Bullish Fund ETF UUP, a trade-weighted gauge tracking the dollar, soared to its highest point in over a year as investors continued to flock to the greenback.
Tariff Speculation Drives Greenback Surge
Much of the dollar's recent strength can be attributed to Trump's proposed tariffs. During his campaign, Trump floated the idea of tariffs as high as 60% on Chinese goods. Additional hikes of 10% to 20% on imports from other countries are also expected.
Tariffs could curb U.S. demand for foreign goods, reducing the need for American companies to buy foreign currencies—a shift that would likely boost the dollar.
Additionally, tariffs might drive up domestic inflation. That could prompt the Fed to rethink its dovish stance on rate cuts, adding even more fuel to the dollar’s rally.
George Vessey, a forex strategist at Convera, said, "Trump's policies of a trade war in which the U.S. is less exposed and more-fiscally stimulative policies are expected to boost U.S. near-term economic outperformance vs. its G10 peers further. Economic momentum has shifted back in favor of the U.S.”
As global investors recalibrate to the new political environment, expectations for the U.S. dollar have jumped.
In the Bank of America Fund Manager Survey conducted before the election, 31% of respondents expected the dollar to be a top performer in 2025, slightly behind the yen at 32%.
After the election, the dollar shot up to the top spot, with 45% of respondents naming it as their favored currency for 2025, while the yen fell to 20%.
JPMorgan's pre-election analysis suggested that a "Republican sweep" scenario — a GOP majority in the House and Senate — would lead to substantial dollar gains. In this scenario, the trade-weighted dollar index is projected to gain 7.3%, with some of the biggest moves expected against the Swedish krona (SEK) at +10.8% and the euro (EUR) at +8.4%.
| Election Scenario | USD TWI Change | USD vs. CNY | USD vs. EUR | USD vs. CAD | USD vs. CAD | USD vs. AUD | USD vs. SEK |
|---|---|---|---|---|---|---|---|
| Republican Sweep | +7.3% | +4.4% | +8.4% | +4.7% | +6.1% | +7.9% | +10.8% |
David Morrison, senior market analyst at Trade Nation, highlighted the role of rising U.S. bond yields in supporting the dollar. "The jump in U.S. bond yields has been a major factor in the dollar's resurgence, as investors bet that the Trump presidency will, thanks to promises of tax cuts and deregulation, lead to increased economic growth. This should continue to surpass anything remotely achievable by the sclerotic economies across Europe and the UK," he said.
The prospect of new U.S. tariffs has European leaders on edge. French President Emmanuel Macron highlighted on Wednesday escalating risks for global supply chains if the U.S., Europe and China re-enter a trade war.
American tariffs are likely to hit European exports of machinery and pharmaceuticals hard, creating potential economic headwinds for an already weak European economies.
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