What’s the Outlook for the U.S. Dollar? | Moomoo Research

Looking back to 2016, Donald Trump’s first election was like a stone thrown into a lake, quickly igniting the market’s enthusiasm for the “re-inflation trade.” At that time, the U.S. dollar index and U.S. Treasury yields rose in tandem, reflecting the market's optimistic expectations for future economic recovery and rising inflation. This period, referred to as “Trump Trade 1.0,” was driven by a series of expansionary policy proposals aimed at promoting economic growth—including significant tax cuts, support for the fossil fuel industry, encouragement of domestic manufacturing, and increased investment in infrastructure.

These policy measures were expected not only to directly stimulate economic growth through increased government spending but also to indirectly boost investment and employment levels, thereby driving up prices and further solidifying the market's re-inflation expectations. As economic activity accelerated and inflationary pressures mounted, the U.S. Treasury yield curve exhibited a pronounced steepening trend, and the dollar index rose accordingly. Historical data indicates that the market’s response to policy expectations is often quicker and more intense than the actual impact of the policies themselves, vividly illustrating the principle of “buy the expectation, sell the fact.”

Entering the second phase of Trump’s presidency, known as “Trump Trade 2.0,” the market once again experienced a wave of re-inflation expectations. At this time, the Trump administration not only continued domestic tax cuts to boost consumer demand but also implemented measures such as imposing high tariffs and restricting foreign labor inflow, aiming to indirectly raise price levels by increasing costs. Although these policy measures come with relatively high costs, they also reinforced market expectations for economic growth and rising inflation. It is worth noting that during this period, signs of economic recovery in the U.S. began to emerge, while the Federal Reserve also started gradually lowering interest rates to address challenges posed by global economic slowdown.

Although the current monetary policy environment contrasts sharply with the interest rate hike cycle at the time of Trump’s first election in 2016, we have reason to believe that re-inflation expectations will remain the core driving force of recent market trading. In this macroeconomic context, short-term accommodative monetary policy is unlikely to significantly hinder the strength of the dollar. Looking ahead, the Federal Reserve's interest rate decisions at the end of the year may be more cautious, aimed at preserving room for future monetary policy adjustments.

Based on current market dynamics, we predict that U.S. Treasury yields will continue to trend upward or remain volatile at high levels. Given the intensified global trade frictions, major economies such as Europe and Japan may face greater economic downturn pressures, which undoubtedly provides additional support for a strong dollar. Although President Trump has expressed a preference for a weaker dollar, achieving this goal in the short term is likely to be challenging.

So, when might the dollar's strength reach a turning point? The answer may lie in the details of policy implementation following Trump’s re-election. Specifically, the timing and intensity of policy rollouts will be key variables determining the dollar's trajectory. In the most likely scenario, the dollar may experience a period of high-level fluctuations; however, if economic growth falls short of expectations or even slips into stagflation, the pressure for dollar depreciation will significantly increase.

In summary, Trump’s re-election will undoubtedly inject new policy expectations into the market, and the strong performance of the dollar is likely to continue in the short term. However, the market's heightened sensitivity also warns us that any significant changes in economic fundamentals could instantly alter the dollar's course. Therefore, investors should closely monitor policy dynamics and macroeconomic indicators, adjusting their investment strategies in a timely manner to adapt to the evolving market environment.