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The incoming administration’s plans for looser fiscal and tighter immigration policy make a strong case for a dollar rally, ING bank said.
The U.S. dollar reached a four-month high following former President Donald Trump’s election victory, driven by investor optimism about the incoming Republican administration.
Since his decisive win, the dollar has surged as investors expect these policies, if they materialize, to have a positive impact on the nation’s economy and its currency.
While the U.S. economy could end up overheating, the dollar will potentially attract more investors next year, according to ING.
There will be “occasional setbacks” to the dollar’s bull trend. “But the over-arching trend should be a dollar-positive one. And positive enough to see the dollar trade-weighted index break to the upside of a two-year range,” the bank’s report states.
“The prospect of stimulative fiscal policy with fewer Fed rate cuts keeps propelling it higher,” she said.
Trump’s Tariffs
Trump’s proposed tariffs also affect the U.S. dollar. The president-elect said he plans to impose 60 percent tariffs on goods from China, with 10–20 percent tariffs on goods imported from other nations.
If these tariffs are levied, it could benefit domestic manufacturing. The measure could also trigger an increase in inflation. As a consequence, the U.S. Federal Reserve may be more hesitant to cut interest rates.
And as long as rates remain high, the U.S. dollar remains attractive to investors, thus boosting its value.
“Despite high interest rates, the US economy is doing pretty well, supporting US stocks. And the rate cuts that we are likely to see within the next 12 months should not erode the yield on dollar bonds too far either,” the report said. “Better growth or asset market returns in the rest of the world are the main channel for a weaker US dollar, but there are also some scenarios that could push the dollar even stronger than it is now. Overall, we will continue to live in a strong US dollar world with a number of risk factors that should support the currency.”
Any erosion in the dollar’s value is expected to be gradual, it said.