Chart of the Week

A DOWNBEAT DOLLAR?

Donald Trump’s return to the White House on 20^th January 2025 is already making waves in markets, much like it did after his 2016 victory.

Back then his surprise win sparked a big dollar rally with the trade-weighted DXY index surging by 6% in the month after Election Day (red circle).

A similar trend is underway this time around with his “America First” policies of tariffs, tax cuts and deregulation amplifying the dollar’s recent advance; the DXY is up 7% since late September (red box).

As we’ve noted before, a strong dollar tends to spell bad news for other markets as it sucks liquidity out of the financial system, making it harder for risk assets to gain traction.

However, all is not lost.

Look how the dollar peaked just as Trump officially took office in January 2017. It then went on to lose 14% during the first 12 months of his tenure (red arrow) as markets acknowledged some of his more extreme policies were being watered down.

History could well repeat with the dollar likely to retrace some of its recent gains as Trump’s second term gets underway.

This would be consistent with the President’s desire for a weaker dollar and our wider view that liquidity conditions will need to remain supportive next year as Central Banks help Governments refinance their debt burdens.