The U.S. dollar remained firm near a 6-1/2-month peak against major currencies on Wednesday, while Bitcoin hovered just below its record highs, as markets braced for key U.S. inflation data and reacted to the impact of the so-called “Trump trade.”
In the wake of Donald Trump’s recent victory in the U.S. presidential election, the dollar has benefited from expectations of inflationary policies under the new Republican administration, which is anticipated to implement tax cuts and trade tariffs. These policies have fueled speculation that inflation may rise, supporting the strength of the dollar.
The “Trump trade” has also lifted U.S. Treasury yields, with markets betting that the Federal Reserve may moderate the extent of its planned rate cuts. Trump’s incoming administration, along with the Republican Party’s likely control of both chambers of Congress starting in January, is expected to push forward policies aimed at reducing taxes and shrinking the federal government.
The U.S. dollar index, which measures the greenback against a basket of major currencies, gained 0.02%, reaching 106.01, just below Tuesday’s high of 106.17, which marked its strongest level since May 1. Meanwhile, Bitcoin paused its climb, falling 0.23% to $87,105.05 after reaching a record high of $89,998 on Tuesday. Trump’s pledge to make the U.S. “the crypto capital of the world” continues to fuel enthusiasm for Bitcoin.
U.S. Inflation Report in Focus
Attention is now turning to the U.S. inflation data, with the October Consumer Price Index (CPI) report due to be released later on Wednesday. The core CPI is expected to rise by 0.3%, but any number above that could reduce the likelihood of a Federal Reserve rate cut in December.
“Inflation and Fed policy will likely dominate the focus for the remainder of the week, but whether the ‘Trump trade’ unwinds in response to this data is yet to be seen,” said Charu Chanana, chief investment strategist at Saxo Bank.
Traders are also facing uncertainty about the Federal Reserve’s future moves following Trump’s election. With inflation potentially on the rise, the central bank may have less flexibility to cut interest rates further under the new administration.
Currently, markets are pricing in a roughly 60% chance of a 0.25% rate cut from the Fed in December, a decrease from the 84% probability seen a month ago, according to CME Group’s FedWatch Tool.
Fed Officials Weigh In
The outlook for U.S. interest rates has been further complicated by comments from Federal Reserve officials. Minneapolis Fed President Neel Kashkari and Richmond Fed President Thomas Barkin both indicated on Tuesday that they were not yet ready to judge the pace or magnitude of any future rate cuts. Federal Reserve Chairman Jerome Powell is scheduled to speak on Thursday, ahead of the release of U.S. Producer Price Index (PPI) data and retail sales figures on Friday.
Euro Struggles Amid Political Uncertainty
The euro faced continued pressure as political uncertainty mounted in Europe. Germany, the eurozone’s largest economy, is set to hold elections on February 23 following the collapse of Chancellor Olaf Scholz’s governing coalition. Additionally, markets are concerned about the potential for new tariffs on Europe, as well as China, under Trump’s administration.
The euro remained near a one-year low, touching $1.0596 on Tuesday, and was last down 0.05% at $1.061875.
Sterling Flat, Pressured by Stronger Dollar
Sterling remained largely unchanged at $1.2746, with the British currency under pressure from the broadly stronger U.S. dollar. Meanwhile, Japan’s wholesale inflation accelerated in October, driven by the weak yen, which pushed up import costs for some goods. This has made the Bank of Japan’s decision on when to raise interest rates more difficult.
The dollar gained 0.17% against the yen, reaching 154.88, after briefly touching 154.934, its highest level against the Japanese currency since July 30.
Aussie Dollar Faces Downward Pressure
The Australian dollar, sensitive to China’s economic outlook, continued to struggle, falling 0.02% to $0.6531. Australian wages grew at their slowest pace since late 2022 in the third quarter, partly due to an influx of new workers and a slowdown in inflation. This could further strengthen the case for interest rate cuts from the Reserve Bank of Australia.
