US Dollar at multi-months highs after Trump's victory

• Trump victory raises expectation of policy-induced inflation, forcing Fed to keep policy restrictive for longer.
• FOMC meets on Thursday with a 25 bps cut priced in.
• US economy continues to grow at or above trend.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, surged to a four-month high after former US President Donald Trump secured the necessary electoral votes to become the next US president. 

The US Dollar Index trades above 105.00 on Wednesday, the highest level since early July, following a steep rise against most major peers. Trump's victory has fueled expectations of his policies, including tax cuts, deficit spending and tariffs, which are anticipated to spur inflation and constrain the Federal Reserve (Fed) from implementing a more dovish monetary policy.

Daily digest market movers: US Dollar rising on Trumps victory

• Markets had anticipated the victory as the US Dollar, UST yields, and US equity futures rose throughout the night, supported by the so-called “Trump Trade”. 
• This implies more inflation under a Trump presidency than otherwise, forcing the Fed to keep policy restrictive for longer.
• Historically, the US Dollar has benefitted the most under a Republican president, a Republican Senate, and a Democratic House.
• The two-day FOMC meeting begins on Wednesday and should end with the expected 25 bps cut.
• Despite a distorted jobs data, the US economy is growing robustly and the labor market remains in solid shape.
• October ISM services PMI was stellar, reflecting robust consumption as we move into Q4.

DXY technical outlook:  DXY breaks out to highest level since July

The DXY index witnessed a surge to multi-month highs, driven by bullish technical indicators. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) approach overbought territory, signaling a potential short-term correction. Wednesday's significant price action suggests consolidation before further upward momentum

Key support levels lie at 104.50, 104.30 and 104.00, while resistance faces at 105.50 and 106.00.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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