As polls showed that Donald J. Trump seemed more likely to return to the White House, the dollar began to rise. When the results became clear, the currency surged.
On the day after the election, the dollar rose more than it had in years against several other major currencies, including the Real. It continued to climb, reaching its highest point of the year on Wednesday (13).
This appreciation is a sharp change after three months of sustained weakening, with the dollar hitting its lowest point of the year at the end of September. Sudden movements in the value of the dollar can have a destabilizing effect on the global economy because the U.S. currency is used in almost 90% of all currency transactions. Essential commodities, such as oil, are typically priced in dollars.
A stronger dollar makes it cheaper for Americans to buy foreign goods and travel abroad, but American companies that export products may become less competitive. Outside the United States, a stronger dollar fuels inflation in countries with weaker currencies and makes it harder for those nations to pay dollar-denominated debts, weighing on the global economy.
But why is the dollar appreciating?
The recent rise is curious because Trump, the elected president, has always said that, for the sake of U.S. exports, he would prefer to see the dollar weaken. But his plans to impose tariffs on imports and cut taxes, among other actions, are expected by most economists to have the opposite effect.
It’s simple to understand: if you impose higher tariffs, they end up making the product more expensive for businesses and, consequently, consumers. More expensive products mean reduced demand for imports in foreign currencies, which tends to raise the value of the dollar as the demand for dollars increases.
Tariffs raise product prices, and rising prices (i.e., faster inflation) can lead the Federal Reserve to increase interest rates. Higher interest rates attract investors seeking higher returns, further increasing the demand for dollars.
In other words, Trump’s proposal to raise tariffs to make American products more competitive could have the reverse effect, generating even more inflation and, consequently, new interest rate hikes.
How much stronger can the dollar get?
The Republicans maintained control of the House, putting them in total control of Congress, in addition to the White House. Analysts at JPMorgan predict that such an outcome could lead the dollar index to gain another 7% increase within months.
Barclays analysts predict that the dollar will be worth as much as the euro for the first time in two years if Trump proceeds with the plan to impose 60% tariffs on Chinese imports and a 10% tax on all other imports.
So, for those living in the United States and earning in dollars, the next year could be the ideal time to take that trip to places with weaker currencies, like Brazil. Conversely, those wanting to visit the United States next year should prepare to spend more.
Source: The New York Times