Donald Trump’s upcoming economic policies are anticipated to boost growth, but concerns about inflation persist. Speculation over tariffs has led to increased Treasury yields and a stronger dollar, impacting global currencies. The Federal Reserve’s cautious stance on interest rates influences market reactions, with analysts predicting continued dollar strength. The People’s Bank of China is taking steps to support the yuan, while rising bond yields in the UK raise questions about future government spending and potential tax increases.
Trump’s Incoming Policies and Their Economic Impact
As Donald Trump prepares to take office next week, discussions are intensifying around his economic policies. Analysts predict that these strategies could stimulate growth, yet they also warn of rising price pressures.
Market Reactions to Tariff Speculations
The looming threat of tariffs, combined with the Federal Reserve’s cautious approach to interest rate cuts this year, has resulted in a spike in Treasury yields and a stronger dollar. This shift is placing additional strain on currencies like the euro, pound, yen, and yuan.
Prashant Newnaha, a senior strategist for rates at TD Securities, mentioned that the market appears to be increasingly concerned about potential gradual increases in U.S. tariffs. “The dollar’s drop following recent headlines indicates that traders have accounted for tariff fears,” Newnaha noted, referencing a Bloomberg report on a potential gradual tariff strategy from the incoming administration.
He added that if such news continues to circulate leading up to Trump’s inauguration, it could very well lead to a decline in U.S. Treasury yields and the dollar, while domestic stocks may see an upward trend.
In early trading, the euro held steady at $1.02475, approaching a low of $1.0177 reached earlier this week. Meanwhile, the yen was positioned at 157.54 per dollar, recovering from a nearly six-month low recorded last week.
The Dollar Index, which gauges the U.S. dollar against six other major currencies, rose by 0.16% to 109.59, remaining near its 26-month high of 110.17 from earlier in the week.
Following Friday’s employment data, which reinforced the Federal Reserve’s cautious stance on monetary policy adjustments, all eyes are now on the inflation report set for release on Wednesday. Traders are currently anticipating a lesser easing of 29 basis points this year, a contrast to the 50 basis points projected by the Fed in December, which had previously unsettled the markets due to inflation apprehensions.
On Monday, U.S. 10-year Treasury yields hit a 14-month peak of 4.799% before experiencing a pullback, settling at 4.7717% as Asian trading began. ING strategists noted that the combination of a robust dollar and rising Treasury yields is redirecting financial flows away from global markets, potentially leading to complications.
Using the tariff period from 2018-2019 as a reference, they predict continued strength for the dollar throughout the year, emphasizing that the dollar/yuan exchange rate is currently a critical area of focus. The People’s Bank of China (PBOC) is actively defending the yuan against depreciation pressures.
The PBOC has introduced multiple measures to bolster its currency, including plans to store more dollars in Hong Kong and facilitate easier borrowing for companies from international sources. This has kept the offshore yuan trading at 7.3465 per dollar in early sessions.
The British pound is also facing scrutiny from global traders, as the rising bond yields affect British markets. While higher yields typically support a currency, analysts suggest that increasing borrowing costs may compel the UK government to reduce spending or hike taxes, which could impede future growth. The pound traded at $1.2211 after dipping to $1.21 earlier this week, marking its lowest point since November 2023.
Meanwhile, the Australian dollar saw a slight increase of 0.13%, reaching $0.6184 after hitting a low not seen since April 2020. The New Zealand dollar also climbed 0.3% to $0.55995, lingering near its two-year low from the previous session.