At first the U.S. dollar reacted badly to the prospect of a Donald Trump presidency.
As battleground state after battleground state fell to the billionaire on election night, the U.S. dollar dropped 2%, mirroring steep declines in other markets.
But Wall Street's fear dissipated this morning (Wednesday). The U.S. dollar not only recovered, but by midmorning was trading slightly higher.
That shift in mood was reflected in the stock market as well, with most markets up just under 1%.
The Mexican peso was hit much harder, plunging more than 13% on election night. The peso was still down 7% against the U.S. dollar in midday trading today.
A possible reason for the sudden reversal in sentiment is that Wall Street realized some of President-elect Donald Trump's policies could be good for the dollar...
Why the U.S. Dollar Rebounded in Wake of Trump Victory
During his campaign, Trump said he would get better trade deals, enact tax cuts, and lower corporate tax rates to encourage repatriation of $2.6 trillion in foreign profits that U.S. companies have stashed overseas. All of those would have a positive impact on the U.S. dollar.
Trump also helped ease concerns in his victory speech. Instead of talking about tariff increases, he promised cooperation with other countries. The softer tone was apparently enough to bring traders in off the ledge, at least for now.
"He could have stood up and listed off China, NAFTA, the wall - he didn't go anywhere on those policies, so that will be at least somewhat reassuring to markets," Derek Halpenny, European Head of Global Markets Review at MUFG in London, told Reuters.
Now, with the divisive election over, investors can expect fewer distractions to deter a strengthening U.S. dollar.
And make no mistake. The forces that have been pushing the U.S. dollar higher over the past two years remain in place and are likely to grow even more powerful in the months ahead.
The U.S. dollar launched its recent run back in 2014, when it rose 21% against a basket of other major world currencies.
That run leveled off earlier this year, with the U.S. dollar slipping about 8% when the U.S. Federal Reserve declined to raise interest rates at the March Federal Open Market Committee (FOMC) meeting.
The decline was short-lived, as the U.S. dollar's catalysts had the greenback again moving higher by May. Since then the greenback is up 4.4%, and it's poised for an even bigger move as we head towards 2017.
Here's what's driving the U.S. dollar higher...
Why Investors Can Expect More U.S. Dollar Strengthening
The most powerful element supporting the U.S. dollar right now is the prospect of a Fed rate hike in December. When the Fed raises rates, it's signaling that it sees an improving U.S. economy. The strength of a nation's economy is the main factor in determining the value of its currency.
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Although the Fed decided against raising rates at its Nov. 1-2 meeting, the markets believe it will make a move in December, exactly one year after the last rate increase. The futures market sees a 71.5% chance of a quarter-point Fed rate hike at the December FOMC meeting.
What's more, the central bank has signaled a hawkish outlook through the Fed dot plot, an estimate by each Fed member about where they think interest rates should be set in the future.
The most recent dot plot from September has the median projection for interest rates at 1.1% for 2017 and 1.9% for 2018. The current Fed funds rate is 0.50%.
The other main force that will keep the U.S. dollar moving higher has to do with other central banks.
Unlike the Federal Reserve, which is in a money-tightening phase, almost all of the world's other central banks are easing. That means they're either lowering interest rates or taking other actions, such as bond-buying, which weaken their currencies.
That's particularly true for the world's other major currencies, such as the Japanese yen, the Eurozone's euro, and the British pound (which has taken a hit from the Brexit vote). The People's Bank of China continues to devalue the yuan.
As the U.S. dollar trades against these weakening currencies, it grows stronger by default.
A stronger U.S. dollar is bad for big multinational companies - it makes their goods more expensive overseas, hurting earnings. But a strong U.S. dollar is good for American consumers, making foreign goods cheaper to buy.
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.