Dollar Rises on Tariff and Tax Speculation
The dollar continues to strengthen amid post-election speculation about potential tariffs and tax cuts, China’s deflationary challenges, and Germany’s brewing political crisis. The euro has reached its lowest point in almost five months.
Election Boost for the Dollar
Despite the bond market closure for Veteran’s Day, the dollar maintained its election-fueled momentum. Reports on Friday suggested, albeit later denied, that Robert Lighthizer was tapped as President-elect Donald Trump’s potential new trade chief. Lighthizer played a key role during Trump’s first term in imposing tariffs on Chinese imports and renegotiating the NAFTA agreement.
Speculation on Lighthizer and Dollar Strategy
While Trump’s tariff policies are seen as dollar-positive, Lighthizer is known to favor a weaker dollar to boost trade competitiveness. Reports earlier this year hinted at attempts to find ways to devalue the currency, although clear strategies remain uncertain. The dollar index rose close to last week’s four-month highs.
Key Figures and Treasury Role
Investor Scott Bessent’s meeting with Trump on Friday, alongside fellow investor John Paulson’s name circulating as a potential Treasury Secretary, has further influenced market movements.
Impact on Euro and Yuan
The euro and China’s offshore yuan were the main currencies impacted by the dollar’s rise. Disappointment in Beijing’s stimulus plans and lower-than-expected inflation figures in China have pressured the yuan. Consumer prices in China increased at only 0.3% in October, the slowest rate in four months, while producer price deflation deepened to 2.9% year-over-year.
China’s Stimulus and Market Reactions
Friday’s approval of a 10 trillion yuan ($1.4 trillion) package to alleviate local government debt fell short of market expectations, compounded by weaker-than-anticipated new bank lending figures. Hong Kong’s Hang Seng Index dropped over 1% to its lowest point since October 18, while mainland stocks showed modest gains.
Germany’s Political Uncertainty
The euro faced additional pressure from Germany’s political uncertainty. Chancellor Olaf Scholz, after a conversation with Trump, indicated he might call for a confidence vote in parliament before Christmas, earlier than previously planned. This raises the possibility of snap elections early next year. Concerns over U.S.-China risks led Deutsche Bank to lower its forecast for the ECB’s terminal interest rate to 1.5%.
U.S. Stocks and Crypto Surge
‘Trump trades’ are continuing to drive Wall Street’s performance. Bitcoin surged to an all-time high above $81,000 on expectations of a favorable regulatory landscape under a Trump administration. U.S. stock futures also edged higher as the S&P 500 topped 6,000 for the first time last Friday.
Inflation and Federal Reserve Outlook
Markets are closely watching the October consumer price index and retail sales data, along with the end of an impressive corporate earnings season. While the Federal Reserve’s recent quarter-point rate cut was anticipated, there remains uncertainty about the inflation trajectory under Trump’s tariff and tax policies. Current market pricing suggests only three more quarter-point cuts by the end of next year, a full percentage point lower than the Fed’s September forecast.