Donald Trump victory bets and strong US economy power dollar gains

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The dollar has roared to its biggest monthly gain in more than two years, propelled by bets that strong economic data and a victory for Donald Trump in next week’s presidential election will lead to interest rates staying higher for longer.

An index measuring the dollar against a basket of six other currencies, including the pound and Japan’s yen, jumped 3.2 per cent in October, its best month since April 2022.

Economists and strategists said the greenback’s sharp rise reflected persistent signs of economic resilience, including surprisingly strong September payrolls data and evidence of higher consumer spending.

“It’s been the perfect storm of dollar-supportive information over the last few weeks,” said Eric Winograd, chief economist at AllianceBernstein. “Our data continues to paint a picture of an economy that isn’t really slowing.”

Market participants said increasing expectations in the market of a Republican election victory had bolstered the dollar’s appeal.

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

Investors believe that if Trump wins and trade tariffs and tax cuts are implemented, then inflationary pressures would be compounded and the Federal Reserve would be less likely to cut interest rates rapidly.

“It’s a combination of better than expected economic data. [And] also the growing consensus that Trump is likely to win the election,” said Andrzej Skiba, head of Bluebay US fixed income at RBC Global Asset Management. “With Trump, you could expect greater pressure on inflation than otherwise would be the case.”

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

After policymakers lowered rates by an unusually large 0.5 percentage points in September, markets priced in at least one more jumbo-sized cut before the year-end.

But those expectations have been scaled back over the past month. Futures markets are pricing in a quarter-point reduction at next week’s Federal Reserve meeting and those views were cemented after October payrolls came in much lower than expected on Friday, albeit distorted by major hurricanes and worker strikes, while the unemployment rate held steady.

Markets at the end of this week showed rising odds of another quarter-point cut in December.

Still, were Harris to win the election, Mark McCormick, head of FX strategy at TD Securities, does not “think Harris is fundamentally negative for the dollar”.

Some positions may unwind if Trump loses the election, he said. “But that’s a dip,” he added. “Data, central banks, the economic outlook — all of those things are moving back in favour of the US.”

For AllianceBernstein’s Winograd, “the extent of that [currency] weakening has to be limited by the [recent economic] data being positive . . . I don’t think the dollar will undo an entire month’s worth of gains.”