The US dollar (DX=F, DX-Y.NYB) continued its recovery on Wednesday, adding gains after the currency was on track to hit a one-week low. This is after a report published by the Washington Post on Monday Which indicates that President-elect Donald Trump will not commit to a strict tariff plan.
But after only two days CNN reported Trump could declare a national economic emergency to trigger global tariffs, which would push the dollar higher as stocks tumble.
The US dollar is “priced to perfection,” Bank of America’s global rates and currencies research team, led by foreign exchange analyst Athanasios Vamfakidis, wrote in a note published on Wednesday. “The US dollar has risen strongly since the US elections, from an already high level.”
The currency’s price action was largely driven by two major catalysts: Trump’s election and subsequent Republican sweep, coupled with a recalibration of future Fed easing in the face of strong economic data.
“American exceptionalism in terms of better economic growth, faster productivity growth, stock market outperformance, and higher yields all act as a collective magnet to attract capital to the United States,” wrote Blake Millard, chief investment officer at Sandbox Financial Partners.
Even data that is often viewed as not very good, such as firm pricing pressures and inflationary headwinds, can be positive for the dollar.
“With the Fed expected to cut interest rates less than most other major central banks, the expected interest rate differentials favor the US dollar,” Millard wrote. “Tariffs will also restrict the flow of goods, resulting in fewer dollars going abroad and reducing demand for foreign currency.”
With most economists agreeing that Trump’s proposed tariff plans will lead to higher inflation over time, the cycle surrounding the dollar’s bullish tendencies remains intact.
Read more about where the dollar could go here.