The US dollar posted its biggest gain since March 2020 as early results from the US presidential election showed Donald Trump ahead in some key states, sending Treasury yields higher amid speculation his policies will keep US interest rates high.
Rising bond yields are promising to draw liquidity to the US as investors cash in on higher yields. The US dollar jumped against all its major peers in Asian trading, even though the election race remains undecided, with key states yet to report their results.
US currency gains
The greenback’s gains were driven by a broad sell-off in the bond market as traders reassessed the prospects of a tight race between Trump and Vice President Kamala Harris. Trump has promised to cut taxes and impose hefty tariffs on imports, which will add to inflation pressures in the United States and likely slow the pace of interest rate cuts by the Federal Reserve.
Trump’s tariff and tax plan should result in higher inflation and larger budget deficits, which means higher interest rates for long-term bonds, said Priya Misra, a portfolio manager at JPMorgan Investment Management.
The Bloomberg Dollar Spot Index rose 1.6%, while the yield on 10-year Treasury notes jumped 18 basis points to 4.46%, the highest since April. The dollar’s strength dragged down global currencies, with the euro falling 1.8%, the Japanese yen, the Australian dollar and the Swiss franc falling more than 1%, and the Mexican peso losing 3%.
The intense competition is exacerbating market volatility, as hedge funds and other traders piled into investments that would benefit from a Republican victory, known as Trump trades — such as betting on U.S. bonds or the Mexican peso — through much of October, before scaling back this week after Kamala Harris’s strong showing in the polls.
US Dollar Bullish Bets
As of Oct. 29, hedge funds and other speculative traders were holding positions that supported a stronger U.S. dollar, driven by demand for safe-haven assets amid uncertainty over the election outcome. The value of these positions, which are betting on a stronger U.S. dollar, was about $17.8 billion, according to Commodity Futures Trading Commission data compiled by Bloomberg.
However, key states like Michigan, Wisconsin and Pennsylvania remain hotly contested and undecided, leaving open the possibility of a major shift in currency markets, as has happened in previous cycles.
Tom Fitzpatrick, managing director of global market analysis at RJ O'Brien, concluded: “These moves make sense if Trump wins, but right now the market is kind of getting ahead of itself.”
