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The dollar posted its biggest gain since the day after his presidential election victory, amid Donald Trump’s threat to impose huge tariffs on BRICS countries and political turmoil in France.
The dollar index against the country’s six currencies rose 0.6% on Monday. The euro was the biggest laggard, but other major currencies such as the British pound and Canadian dollar also fell as the French government teetered on the brink of collapse.
Monday’s gains marked the latest move in the dollar’s strong rally, spurred by Trump’s victory in last month’s presidential election. Investors say President Trump’s tariff plans are inflationary and will hinder the Fed’s ability to lower interest rates.
President Trump added to concerns over the weekend by threatening to impose 100% tariffs on BRICS countries unless their governments agree not to create a new currency to replace the US dollar.
“There is little doubt that President Trump’s tweets are once again a major short-term driver for currency markets,” said Jonas Goltermann, deputy chief market economist at Capital Economics.
A study released Monday by the Institute for Supply Management showed that U.S. manufacturing activity cooled more slowly than expected in November, further raising the possibility that the pace of interest rate cuts will slow.
Policymakers said they expect inflation to fall toward its 2% target, and the Fed cut interest rates by 0.25 percentage points in November, following a 0.5 percentage point cut in September.
Views on a December interest rate cut in the U.S. on Monday afternoon after Fed Director Christopher Waller said he was in favor of another rate cut later this month unless pre-meeting data paint a different picture than now. became stronger.
This allowed the dollar to let go of some of its gains and limit the rise in the two-year Treasury yield, which is closely tied to Fed expectations. In late trading, the note was little changed at 4.18%.
Investors are bracing for several other key U.S. economic events this week, including Fed Chairman Jay Powell’s remarks on Wednesday and the jobs report on Friday.
“This data will determine whether the Fed eases interest rates by a quarter of a percentage point this month or pauses them,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. .
Investors are pricing in a 75% chance that the Fed will cut interest rates by a quarter of a percentage point at its Dec. 17-18 meeting, according to CME Group data. Investors in recent weeks have reduced the likelihood of a December interest rate cut and scaled back bets on the amount of further easing next year after a series of positive economic reports.
Win Hsin, global head of market strategy at Brown Brothers Harriman, said the strong U.S. economy relative to other regions will continue to support rising U.S. Treasury yields and a strong dollar.
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Guy Miller, chief market strategist at insurance group Zurich, echoed that view, saying the dollar’s strength is “going to continue.”
The euro also fell 0.8% to $1.05 against the dollar, as France’s political crisis intensifies and Prime Minister Michel Barnier faces a vote of no confidence over his government’s tax and spending plans. The closely watched difference between French and German government bond yields, or “spread,” has recently risen to its highest level in 12 years.
Jim McCormick, a macro strategist at Citi, said the “risk of a no-confidence vote bringing down the government” had helped weaken the euro and widen spreads on French government bonds. “However, the response is modest given the potential risks.”
