The dollar continues its run on Tuesday, driven by the prospects of Donald Trump‘s inflationary policies, while other safe haven assets such as gold and the yen benefit from the market’s geopolitical fears.
At around 10.10am GMT (11.10am in Paris), the US currency rose 0.44% against the euro, to $1.0552, and 0.34% against the pound, to $1.2634 .
After the slight decline the day before, the greenback regains momentum on Tuesday, while the chances of a rate cut by the Federal Reserve (Fed) at the next meeting on December 17 and 18 decrease, points out Patrick Munnelly, of Tickmill.
“The markets consider the budget expenditures planned” by President-elect Donald Trump, namely “the increase in customs duties and the tightening of immigration, to be inflationary”, observes the analyst.
These policies “could therefore hinder the Fed’s rate cuts at a time when a series of solid economic data is already narrowing the US central bank’s room for maneuver.”
On a geopolitical level, Russian President Vladimir Putin signed the decree on Tuesday, on the thousandth day of his offensive against Ukraine, which expands the possibilities of using nuclear weapons.
This signing comes soon after the United States authorized Kiev to strike Russian soil with its long-range missiles.
Like the yen, gold is also “riding the wave of geopolitical anxiety”, especially as ”the specter of a trade war” looms which could be provoked by the introduction of new customs duties against the United States, underlines the analyst Stephen Innes at SPI AM.
On Tuesday, gold gained 0.86% to $2,634.40 an ounce.
What role do inflation expectations play in shaping investment strategies in the current market?
Title: Currency and Confidence: A Conversation with Financial Expert Patrick Munnelly
Editor (Time.news): Good morning, everyone. Today, we’re diving into the dynamics of the currency markets, particularly how recent political developments are impacting the U.S. dollar. I’m thrilled to be joined by Patrick Munnelly, a leading analyst at Tickmill. Patrick, thank you for being here.
Patrick Munnelly: Good morning! It’s great to be here and discuss these pivotal events in the markets.
Editor: Let’s start with the dollar’s recent performance. We’ve seen it rise against both the euro and the pound recently. What’s behind this upward trend?
Patrick: The recent rise in the dollar can largely be attributed to growing anticipation around Donald Trump’s inflationary policies. The markets are reacting to his planned budget expenditures, which include increased customs duties and stricter immigration measures. Investors perceive these moves as likely to inflationary pressures, which typically bolster the dollar.
Editor: Interesting. So, you’re saying that traders are essentially pricing in inflation based on these policy proposals?
Patrick: Exactly. Inflation expectations can significantly influence currency values. As market participants factor in the potential for increased spending and tariffs, they tend to favor the dollar as a safe haven, especially amid ongoing geopolitical uncertainties.
Editor: Speaking of safe havens, we also see gold and the yen benefiting in this climate. How do you see the interplay between these assets and the dollar?
Patrick: It’s an intriguing balance. While the dollar is strengthening due to anticipated inflation, gold typically thrives in times of uncertainty as it is viewed as a hedge against inflation and economic turmoil. Similarly, the yen also acts as a safe haven. Investors are weighing these assets against the dollar, which is still considered the world’s primary reserve currency.
Editor: So, as political risks mount globally, it creates a flight to safety while simultaneously enhancing the dollar’s attractiveness due to domestic policies. Does this also impact expectations around the Federal Reserve and interest rates?
Patrick: Absolutely. With the chances of a rate cut by the Federal Reserve diminishing, especially in light of these inflationary prospects, investors are more likely to favor the dollar for its yield. This can create a feedback loop where a stronger dollar incentivizes further investment in U.S. assets.
Editor: That makes sense. Looking ahead to the Fed meetings in December, do you think the current market sentiment will influence their decisions?
Patrick: It’s certainly a factor. If the Fed feels that inflation is on the rise and with fiscal policy tilting toward stimulative measures, they might opt to hold or even raise rates, further strengthening the dollar. The key will be watching economic indicators leading up to that meeting.
Editor: So much rides on economic data in these volatile times. Before we wrap up, any final thoughts on what investors should be keeping an eye on in the coming weeks?
Patrick: Yes, I’d advise investors to closely monitor the ongoing discussions regarding fiscal policy and any geopolitical developments that could shake the markets. The interplay between inflation expectations and monetary policy will continue to drive currency movements, particularly with the dollar.
Editor: Wonderful insights, Patrick! Thank you so much for taking the time to share your expertise today. It’s clear that the intersection of politics and finance creates a dynamic landscape for investors.
Patrick: Thank you for having me! It’s always a pleasure to discuss these vital issues.
Editor: And thank you to our readers for tuning in. Stay informed and keep an eye on the markets as the situation evolves.