Why the US dollar is getting stronger

NEW YORK – As the polls and prediction markets showed that Donald Trump was more likely to return to the White House, the value of the dollar began to rise. When the result became clear, it skyrocketed.

The day after the election, the dollar rose the most in years against a basket of other major currencies. And the rate has continued to rise, reaching a new high for the year on November 13, as economists and traders considered the president-elect’s proposed policies and revised their forecasts for the world’s dominant currency.

This strength marks a sharp shift after three months of sustained weakening, with the dollar hitting its low of the year in late September.

Sharp movements in the value of the dollar could have a destabilizing effect on the global economy, as the US currency is responsible for almost 90 percent of all currency transactions. Essential commodities, such as oil, are usually priced in dollars.

A stronger dollar makes it cheaper for Americans to buy foreign goods and travel abroad, but American companies that export products could become less competitive. Outside the United States, a strengthening dollar fuels inflation in countries with weaker currencies and makes it harder to pay off dollar-denominated debt, weighing on the global economy.

Why is the dollar getting stronger?

The recent rise may seem strange because Trump has often said that for the sake of U.S. exports, he would prefer to see the dollar weaken. But most economists expect his plans to impose tariffs and cut taxes, among other things, will do the opposite.

Traders seem to agree: The broad dollar index is up about 3 percent since Election Day, which is a big move for that market in such a short period. Nearly every major currency has lost value against the dollar in 2024, with pronounced declines in recent weeks. The Japanese yen has fallen about 9 percent since the beginning of the year and the Mexican peso has fallen more than 17 percent against the dollar.

The benefits of a stronger dollar, in terms of purchasing power for US households and businesses, will erode if it is accompanied by rising interest rates and higher inflation, as was the case during a period of dollar strength in 2022. Some analysts and investors believe that The dollar could become even stronger in the coming months. This combination is again considered possible, which would probably leave many Americans feeling relatively poorer.

Much depends on whether the Trump administration’s campaign promises come true. “Trump is the big driver of the dollar,” said Standard Chartered analyst Steven Englander.

Sweeping tariffs, a signature Trump campaign promise, would essentially impose taxes on all imported goods. Supporters say tariffs promote domestic alternatives by making imports more expensive.

However, for auto companies that build or buy parts abroad, or for apparel companies with factories around the world, moving production to the US is expensive and time-consuming.

That’s why the immediate effect of tariffs is generally to make things more expensive for businesses and consumers, reducing demand for imports priced in foreign currencies, which tends to push up the value of the dollar.

Rising prices (i.e., faster inflation) can prompt the Federal Reserve to raise interest rates. And higher interest rates attract investments from investors looking for higher returns, further increasing demand for dollars.

Mr Matt Bush, US economist at Guggenheim Investments, said the dollar’s strength reflected “American exceptionalism” in terms of its stronger economy and the potential for higher inflation.