In brief

• The U.S. dollar (USD) and Treasury yields have risen after the elections, and this strength is poised to continue in the near term.
• President-elect Trump’s proposed policies are likely to result in higher fiscal deficits and stronger growth. There are also risks to inflation rebounding from both supply and demand factors, leading to higher yields.
• Despite USD strength, there remains an investment case for Asian equities given the tailwinds from technology and supply chain reallocations.
  

The USD has appreciated since the end of September, boosted further by the Republicans' clean sweep in the elections. The USD index rose 5% during this period, breaching 105 and potentially testing the year's high of 106.30. We see U.S. Treasury (UST) yields continuing to be a key influence on the USD. President-elect Trump's victory has so far pushed bond yields higher, fueled by expectations of stronger growth, the risk of inflation rebounding and rising fiscal debt. Trump's policy intentions in the weeks ahead, along with his cabinet picks and the actual implementation after inauguration should determine both UST and USD trends. We anticipate that the greenback will retain its strength in the near term.

USD strengthened on Trump’s policy stance

While President-elect Trump has expressed a preference for a weaker USD, his campaign pledges point in the opposite direction. Not only is he looking to extend the 2017 Tax Cuts and Jobs Act (TCJA) tax cuts, but he has also pledged to seek other areas for reducing tax rates for corporations, overtime and tips for workers. Depending on his ability to cut spending, a reduction in fiscal revenue is likely to result in a higher fiscal deficit. 

Higher fiscal deficits and government debt could prompt investors to demand a higher premium for holding UST. The potential effect on boosting growth could also prevent inflation from declining further. Both these factors have led to a rise in UST yields.

His proposal to raise tariffs against China and other trade partners is also potentially inflationary, even though the impact on growth is likely to be negative. Since the burden of tariffs is typically borne by consumers and retailers, this could result in higher consumer prices. Although a one-off tariff increase would only directly lead to a one-time increase in consumer prices, there could be second-round effects on higher consumer inflation expectations, as well as a long-term reshuffling of supply chains that could make consumer goods more expensive. Countries penalized by higher tariffs could also opt for currency depreciation to partially offset the negative impact, contributing to USD strength.

On immigration, more stringent policies and the potential deportation of illegal immigrants could reduce labor supply and contribute to wage inflation.

Hence, Trump’s overall direction is toward more support for growth, which has fueled the equity rally since November 5. Yet, these policies could also drive inflation from both demand and supply sides, leading to higher UST yields.

Exhibit 1: U.S. Dollar Index against the U.S. 2-year Treasury yield

Source: FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of 12/11/24.

Where do we go from here?

Against major currencies, the USD’s strength since the end of September has been most significant against the Japanese yen (-6.7%), New Zealand dollar (-6.0%) and Australian dollar (-5.0%). Among Asian currencies, ASEAN currencies such as the Thai baht (-7.3%) and Malaysian ringgit (-6.9%) experienced larger corrections. The Chinese yuan’s depreciation has been relatively modest so far.

We expect the USD to retain its strength in the near term as investors await more detailed policy direction from the incoming administration. President-elect Trump may disclose more about his plans in the weeks ahead. Some policies could be implemented sooner through executive power, such as tariffs and selected immigration measures, while fiscal policy may require more coordination with Congress.

The Federal Reserve’s (Fed’s) reaction to these policies could also be crucial in driving bond yields. Fed Chair Jerome Powell has refrained from speculating on how the central bank would respond to policies from the new administration. The December update of the Summary of Economic Projections could reveal Fed members’ personal views on policy bias for 2025. Meanwhile, the Overnight Index Swap (OIS) market is pricing in a 68% chance of a 25 basis points (bps) rate cut in December, with expectations for further cuts amounting to 60 bps in 2025—approximately two 25 bps cuts—compared with the Fed’s median projection of four rate cuts for next year.

Although the USD is overvalued, the current policy mix could keep bond yields elevated for the time being. This is further supported by the prospects of U.S. growth rates outperforming those of other developed markets. USD assets, including equities, are clear beneficiaries of this development. While we have long argued that a weaker USD would benefit Asian and emerging market assets, there remains an investment case for Asian equities amid a strong USD environment. Tech exports continue to thrive under the artificial intelligence evolution, and the ongoing shift in the global supply chain could benefit ASEAN and India as they develop manufacturing and logistics capabilities.

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