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The dollar recorded its most significant increase since the day following Donald Trump’s election victory, driven by his threats of substantial tariffs on Brics nations and escalating political turmoil in France.
The dollar index, which measures the currency against six major peers, surged by 0.6% on Monday. The euro experienced significant losses due to the uncertainty surrounding France’s government, while other major currencies like the UK pound and Canadian dollar also saw declines.
Monday’s uptick in the dollar continues its strong rally post-Trump’s election win last month. Investors are speculating that Trump’s tariff proposals will lead to inflation, potentially hindering the Federal Reserve’s ability to lower interest rates.
Trump heightened concerns over the weekend by threatening 100% tariffs on Brics countries unless they agreed not to introduce a new currency as an alternative to the US dollar.
“It’s clear that Trump’s tweets are once again playing a significant role in driving short-term movements in currency markets,” said Jonas Goltermann, Deputy Chief Markets Economist at Capital Economics.
A report from the Institute for Supply Management on Monday, showing a milder-than-expected slowdown in US manufacturing activity in November, further supported the case for a slower pace of rate cuts.
The Fed reduced rates by 0.25 percentage points in November following a 0.5-point cut in September, anticipating that inflation would gradually approach their 2% target.
Expectations of a December rate cut increased in the US later on Monday after Fed Governor Christopher Waller expressed support for further rate reductions later this month, pending any significant changes in data prior to the meeting.
This caused the dollar to relinquish some of its gains and tempered the rise in US two-year Treasury yields, which closely reflect Fed expectations. The yields remained relatively stable at 4.18% by the end of trading.
Investors are preparing for several key US economic events this week, including remarks from Fed Chair Jay Powell on Wednesday and highly anticipated job figures on Friday.
“This data will determine whether the Fed proceeds with a quarter-point rate cut this month or decides to pause,” said Andrew Brenner, Head of International Fixed Income at NatAlliance Securities.
Market data indicates a 75% probability of the Fed implementing a quarter-point rate cut during their December 17-18 meeting, according to CME Group data. Recent strong economic indicators have led investors to reduce expectations of a December rate cut and scale back on projected easing measures for next year.
Win Thin, Global Head of Market Strategy at Brown Brothers Harriman, emphasized the stronger US economy relative to other regions, which is likely to sustain higher Treasury yields and a stronger dollar.
Guy Miller, Chief Market Strategist at Zurich Insurance Group, echoed this sentiment by stating that the dollar’s uptrend is likely to continue.
The euro also depreciated by 0.8% against the dollar to $1.05 as France faced a political crisis, with Prime Minister Michel Barnier confronting a no-confidence vote over the government’s fiscal policies. The yield spread between French and German government bonds, a closely monitored indicator, approached a 12-year high.
Jim McCormick, Macro Strategist at Citi, noted that the “risk of a no-confidence vote toppling the government” contributed to the euro’s weakness and increased spreads on French sovereign debt. However, he added that the market’s reaction has been relatively subdued given the underlying risks.