'The Dollar Will Remain Mighty': Investors Double Down On Trump's Economic Gambit

Wall Street investors are betting heavily on a strong U.S. dollar during Trump’s second term, even as uncertainty looms over his proposed economic policies.

Currency traders have steadily pushed up the dollar’s value against major international currencies since election night, signaling confidence in American economic dominance despite Trump’s historically stated preference for a weaker dollar. “The most straightforward judgments come from currency traders, who are betting the dollar will remain mighty,” The Economist said. Meanwhile, the Mexican and Canadian currencies have declined amid concerns over potential 25% tariffs on their exports.

Since Trump’s election, U.S. stock markets have outperformed global competitors, rising 3%, while European, Japanese and Canadian markets remain stagnant at late-2022 levels. 

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Technology and financial sectors have also seen gains, buoyed by expectations of reduced regulation. However, industries seemingly aligned with Trump’s policy priorities have struggled. Despite his pro-drilling stance, energy stocks remain constrained by low oil prices.

Real estate has suffered from rising borrowing costs, while materials companies face headwinds from potential import tariffs.

The Treasury bond market is a key concern for investors. Ten-year yields have climbed to 4.6% from 3.6% in September, with roughly 80% of the increase stemming from rising term premiums – the extra yield investors demand for potential risks like inflation or unsustainable borrowing.

Consumer discretionary companies like Amazon and Tesla have emerged as clear market winners, benefiting from expectations of extended personal income tax cuts. Meanwhile, traditional energy sector stocks have slipped despite Trump’s pro-drilling stance, with production constrained by low oil prices rather than drilling permissions.

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Market analysts and fund managers interviewed by The Economist expect new tariffs but remain uncertain about potential retaliatory measures from trading partners. While few anticipate massive deportations, concerns persist about inflation risks from stricter immigration policies. 

The federal deficit, currently at 6.4% of GDP, remains a worry despite hopes that fiscal conservatives in Congress and Trump’s economic team will maintain discipline.

As Wall Street braces for Inauguration Day, bond traders’ growing unease could force Trump to balance his ambitious economic agenda with the market forces that have historically constrained presidential power.

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