Wall Street is betting that the dollar will rise further after its recent surge, challenging the hopes expressed by incoming President Trump for a weaker dollar.

Since the beginning of October, the dollar has surged by 6.1%, marking its best quarterly performance since the Fed's rate hikes began in 2022, as the market started to anticipate that the Republican candidate would win the election in November and implement his trade tariffs and tax cuts.

Most major banks surveyed by the Financial Times (including Goldman Sachs, Morgan Stanley, and UBS) predict that the dollar will rise further next year. Deutsche Bank expects the euro to reach parity against the dollar by 2025, after the euro fell from 1.11 at the beginning of October to 1.05.

As a result, many fund managers dismiss the likelihood that Trump can help domestic industries by weakening the dollar, regardless of his rhetoric.

Sonal Desai, Chief Investment Officer of Franklin Templeton Fixed Income, stated that Trump's idea of devaluing the dollar is "a bit fanciful, it feels like there are a lot of contradictory factors at play."

She added, "So far, most of the policies he has discussed will actually be beneficial for the dollar, not detrimental to it."

Trump has long believed that a strong dollar puts too much pressure on the U.S. economy, leading to speculation about whether the incoming government will take action to try to lower the dollar.

In an interview with Bloomberg Businessweek in July, Trump said, "We have a serious monetary problem," pointing out the strength of the dollar against the yen.

He added, "This is a huge burden for companies trying to sell tractors and other products outside the U.S."

Trump's preference for a weak dollar was clearly evident during his first term in office when he criticized what he viewed as unfair currency practices by other countries.

However, his pro-growth agenda and proposed tax cuts, along with calls for high tariffs on imports from Mexico, Canada, and China, have led the market to generally expect that this will stimulate domestic inflation. This could result in the Federal Reserve maintaining higher interest rates for a longer period, which in turn could attract more foreign capital into dollar assets.

Ajay Rajadhyaksha, Chairman of Global Research at Barclays, stated, "Trump's policies are definitely favorable for the dollar." The bank expects the euro to fall to 1.04 against the dollar by the end of next year.

Analysts and investors say this poses a dilemma for the incoming government. They noted that any possible solution (such as controlling budget deficits or creating the so-called "Mar-a-Lago agreement," which pressures trade partners to devalue the dollar) would be extremely challenging and could undermine the dollar's status as the global reserve currency.

Eric Winograd, Chief Economist at AllianceBernstein, stated, "The next president is concerned about the importance of the dollar's dominance and whether other countries will discuss trading in currencies other than the dollar; the clearest course for investors is to go long on the dollar and prepare for its appreciation."

Investors and strategists have largely poured cold water on the idea of a "Plaza Accord"-style framework, referring to the agreement reached by the Reagan administration in 1985 that led to a multilateral currency intervention agreement to devalue the dollar against other currencies.

Desai of Franklin Templeton stated that while Trump may pressure countries managing their exchange rates, he cannot control the dollar.

Desai said, "I'm not sure if he can really shout that the euro is too low against the dollar, but more importantly, the euro is a currency that the Fed cannot control."

The dollar's rally has shown signs of stagnation in recent weeks, with the dollar index currently hovering around the 107 mark, down from over 108 at the end of last month.

However, despite analysts emphasizing that the market has already digested much of the impact of President Trump's term, few believe this is a sign that the rally is over or that Republican rhetoric might depress the dollar.

Winograd from AllianceBernstein said, "He can try to suppress the dollar. But in the end, fundamentals often prevail."

Article reposted from: Jin Shi Data