The US dollar surged to a six-month high on Tuesday, fueled by investor concerns that a potential second term for Donald Trump could lead to increased inflation.
The dollar index, which tracks the greenback against a basket of major currencies, climbed 0.6% to its highest level since May and ended the day up 0.4%. This spike comes as markets adjust to the possible inflationary impact of Trump’s proposed tariffs and pro-growth policies.
Treasury yields also surged as traders recalibrated their expectations for interest rate cuts by the Federal Reserve. The yield on the benchmark 10-year Treasury jumped 0.11 percentage points to 4.42%, while the two-year Treasury yield, more sensitive to rate forecasts, rose 0.08 percentage points to 4.34%. Investors have scaled back their rate-cut expectations, with futures markets now pricing in a 62% chance of another cut in December, down from 81% before the election.
The market volatility comes in response to Trump’s plan to reintroduce tariffs, with proposals including a 60% tariff on Chinese imports and blanket duties between 10% and 20% on goods from other trade partners. With a Republican sweep of both houses of Congress increasingly likely, investors are bracing for Trump’s pro-growth policies to drive up inflation, potentially creating headwinds for rate cuts in 2024.
Neel Kashkari, president of the Minneapolis Fed, noted that recent “inflation surprises” may influence the central bank’s approach in the coming months. Economists from Brown Brothers Harriman and BMO Capital Markets echoed concerns that a second Trump administration could prioritize inflationary policies, pushing the Fed to remain cautious.
The dollar’s strength is already pressuring foreign currencies, with the Bloomberg Dollar Spot Index hitting its highest level since 2022. The euro fell 0.5% to $1.0602, close to a yearly low, while the Japanese yen weakened to 154.6 per dollar. Wall Street strategists from firms including JPMorgan, Goldman Sachs, and Citigroup predict the dollar rally could extend into 2026, spurred by Trump’s protectionist policies and robust domestic growth projections.
JPMorgan strategists highlighted a “US dollar exceptionalism” in the global market, asserting that no other currency matches the dollar’s combination of growth, high yields, and defensive positioning. Meanwhile, Amundi’s Andreas Koenig increased his long-dollar position.
“The result of this election seems positive for the US and for the dollar, and negative for other countries, especially Europe,” Koenig said.
Rising Treasury yields dampened US stock markets on Tuesday, with the S&P 500 down 0.3% and the Nasdaq Composite slipping 0.1%. In Europe, markets suffered more pronounced losses as tariff concerns weighed on export-dependent sectors. The Stoxx 600 fell 2%—its worst day since early August—while France’s CAC 40 dropped 2.7% and Germany’s DAX declined 2.1%.
European manufacturers, particularly carmakers, are wary of a double impact from US tariffs on exports and a potential influx of cheaper Chinese imports if Trump’s policies are enacted. Tomasz Wieladek, chief European economist at T. Rowe Price, emphasized that “Europe is being squeezed” between US protectionism and heightened competition from China.
Commodities markets also felt the ripple effects of Trump’s potential tariffs, with copper prices falling nearly 2% in London as traders anticipated slower global demand. Kelly Ke-Shu Chen, an analyst with DNB Markets, warned that appointing Marco Rubio as Secretary of State and Mike Waltz as National Security Adviser could dampen hopes for US-China dialogue, heightening the likelihood of sustained protectionist measures.
Across Wall Street, the dollar rally has become the consensus view, with major banks expecting further gains driven by Trump’s policies and economic momentum. While strategists see a strong dollar as a baseline expectation, Skylar Montgomery Koning of Barclays cautioned that “the extent of strength will depend on actual policy delivery.”
