The Dollar’s Ascent: A Strategic Bet on a Trump Victory

In the ever-shifting landscape of financial markets, a noticeable trend has emerged this October: the U.S. dollar is rallying. However, this is not merely a reflection of economic fundamentals; it’s significantly influenced by investor sentiment surrounding the upcoming presidential election. As we edge closer to November 5, confidence in Republican nominee Donald Trump’s potential victory is playing an integral role in the dollar’s strength.

Market Confidence Fuels Dollar Strength

According to Thierry Wizman, FX and rates strategist at Macquarie, the rise in the dollar can be attributed largely to a growing belief that Trump will emerge victorious against Vice President Kamala Harris. The ICE U.S. Dollar Index (DXY)—a benchmark that measures the dollar’s strength against a basket of six major currencies—has surged by 2.5% in October, effectively turning the dollar positive for the year. This move can be traced back to the prediction markets, where the likelihood of a Trump win has escalated from near parity in late September to approximately 55% today.

Inflationary Policies and Interest Rates

Wizman argues that Trump’s policy agenda, which consists of higher tariffs, reduced immigration, and lower taxes, is inherently inflationary. Such policies would compel the Federal Reserve to adopt a more hawkish stance in the near future, particularly during the 2025-26 timeframe. This inflationary approach would ultimately lead to higher interest rates, further supporting the dollar’s ascent against international rivals.

A Strong-Dollar Approach

One might be surprised to re-evaluate Trump as a strong-dollar candidate. After all, during his first term, he often lamented the detrimental effects of weak foreign currencies on U.S. competitiveness. Yet, as Wizman points out, Trump’s recognition of the adverse effects of inflation on his political opposition indicates a shift toward advocating for a stronger dollar. In fact, Trump recently threatened to impose 100% tariffs on nations that “leave the dollar,” signaling his commitment to maintaining the dollar’s predominance as the world’s reserve currency.

The Economic Ramifications of Policy Decisions

The potential economic implications of Trump’s policies are vast. Wizman notes that the Trump administration’s core economic strategies would drive a higher trajectory for both real and nominal interest rates, making U.S. assets far more appealing for investors. As U.S. rates rise relative to other economies, the dollar is poised to gain additional ground.

However, there is a caveat. The overarching trends in bond yields could potentially thwart whoever occupies the Oval Office post-election. Concerns over U.S. fiscal policy have already led to an uptick in Treasury yields, which have seen significant movement even amidst the Fed’s 50-basis-point rate cut last month.

A Tight Race and Its Effects on the Dollar

While Trump may appear to have momentum in the betting markets, polls indicate that the race remains remarkably close. Analysts suggest that the narrow margins, especially in crucial swing states, are giving bettors a reason to believe that a Trump victory could be on the horizon. Should Harris manage to secure the win or if betting markets flip in her favor leading up to Election Day, it is plausible that the dollar could revert to a portion of its recent gains. Current exchange rates indicate that if Harris prevails, the euro could bounce back towards levels around $1.11 or $1.12.

Conclusion: A Strategic Bet Amid Uncertainty

What we appear to be witnessing in the market today is a calculated down payment on the prospect of a Trump victory. Investors are responding robustly to the ramifications of potential Trump-led inflationary policies and the resulting economic environment. As November 5 approaches, all eyes will be on the ballot—but for the time being, the dollar stands tall. While we can speculate about the possible trajectories of U.S. currency in relation to different political outcomes, one thing remains clear: a robust dollar reflects the confidence of its backers in the policies they believe will lead to economic growth.