Bets on Donald Trump victory and strong U.S. economy boost dollar gains

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The dollar posted its biggest monthly gain in more than two years, propelled by bets that strong economic data and a Donald Trump victory in next week's presidential election would lead to higher interest rates for longer. a long time.

An index measuring the dollar against a basket of six other currencies, including the pound sterling and the Japanese yen, jumped 3.2% in October, its best month since April 2022.

Economists and strategists said the greenback's sharp rise reflected continuing signs of economic resilience, including surprisingly strong September jobs data and evidence of rising consumer spending.

The past few weeks have been a perfect storm of dollar-friendly news, said Eric Winograd, chief economist at AllianceBernstein. Our data continues to paint a picture of an economy that is not really slowing down.

Market participants said rising expectations of a Republican election victory had boosted the dollar's appeal.

The latest polls have Trump and Democratic candidate Kamala Harris virtually neck and neck, setting the stage for an extremely close race on November 5.

Investors believe that if Trump wins and trade tariffs and tax cuts are implemented, inflationary pressures will worsen and the Federal Reserve will be less likely to cut interest rates quickly.

It's a combination of better-than-expected economic data. [And] There is also a growing consensus that Trump is likely to win the election, said Andrzej Skiba, head of Bluebay U.S. fixed income at RBC Global Asset Management. With Trump, we might expect greater inflationary pressure than would otherwise be the case.

While Trump has stated his preference for a weaker dollar, strategists have said it is logistically difficult to weaken a currency.

After policymakers cut rates by an unusually large 0.5 percentage points in September, markets have priced in at least one more massive cut before the end of the year.

But those expectations have been lowered over the past month. Futures markets are pricing in a quarter-point cut at next week's Federal Reserve meeting and those views were solidified after October payrolls came in well below expectations on Friday, although distorted by major hurricanes and worker strikes, while the unemployment rate remained stable.

By the end of this week, markets showed an increasing likelihood of another quarter point decline in December.

Still, even if Harris were to win the election, Mark McCormick, head of foreign exchange strategy at TD Securities, doesn't think Harris is fundamentally negative on the dollar.

Some positions could collapse if Trump loses the election, he said. But it’s a decline, he added. The data, the central banks, the economic outlook, it all comes back in favor of the United States.

For AllianceBernsteins Winograd, the scale of this [currency] the attenuation must be limited by the [recent economic] the data is positive… I don't think the dollar will wipe out entire months of gains.

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