The greenback hit a 13-year high on Wednesday, driven by investors’ hopes that the Federal Reserve may raise rates more quickly under a Donald Trump presidency.
Even before the election, the Fed was already priming to raise rates at its next meeting in December. Higher interest rates and more government spending are a great combination of forces for the value of the dollar.
“It’s the best policy mix for a currency,” says Marc Chandler, global head of currency strategy, at Brown Brothers Harriman.
The ICE Dollar Index hit 100.57 on Wednesday. It tracks the dollar’s value versus the world’s most traded currencies.
Trump promises to spend big on America’s roads and bridges, which could increase prices, wages and employment. That boost would increase overall economic growth in America, which has been sluggish in recent years. Better growth equals a stronger dollar.
But a stronger dollar isn’t good for all Americans. In fact, it could hurt the very manufacturing workers Trump has vowed to help.
When the dollar rises, it makes American goods more expensive — and less attractive — to foreign buyers. So if U.S. manufacturers ship abroad, the cost of doing business goes up if the dollar gains value.
That’s exactly what happened in 2015. The dollar rose sharply on the hopes that the Fed would raise rates, then U.S. trade declined and America’s manufacturing sector went into recession for five months.
There aren’t many details to Trump’s big spending plan, which makes it difficult to know how much it will help or hurt the economy.
Higher prices would force the Fed to raise interest rates faster. More rate hikes — or at least the belief of more to come — would strengthen the dollar. For example, before the Fed raised rates in December 2015, the tiniest hint of a rate hike caused the dollar to surge.
Another key factor for the dollar is oil. When oil prices fall, the dollar goes up, and vice versa. In recent weeks, oil prices have gone south, also helping the dollar’s value.
Overall, the greenback is expected to get stronger in the next year or two because the Fed is raising rates while other countries like the U.K., Japan and European Central Bank are lowering rates, which weakens their currencies.
“One of the big impacts on the dollar is the Fed hiking rates especially as other central banks stay pat,” says Luke Tilley, chief U.S. economist at Wilmington Trust.
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