The Pain of a Surging Dollar

The U.S. dollar has been surging since the surprise election of Donald Trump as the 45th President of the United States. Investors have stepped up their dollar buying as they look forward to profiting from economic stimulus under Trump administration. But as the dollar rises, it is causing havoc for rivals and in the bonds market where the U.S. Treasury notes have recently tested new lows.

Selloff in the bonds market

The sharp and rapid rise of the dollar is upending the debt market. Data from Bank of America Merrill Lynch shows that last week investors pulled a massive $18.1 billion from bond markets, the largest such move in more than three years. But equity markets are benefiting from the bond market crisis. The bank’s data further shows that last week investors pumped $27.5 million into equities globally, the largest such move since two years ago.

The selloff in the bonds market has pushed up yields dramatically, complicating the picture for many American companies that rely on debt funding for share repurchase and dividend programs. The rising yields are also expected to rattle mortgage and housing markets because of high costs of borrowing.

Stronger dollar weakens currencies in emerging markets

In emerging markets and struggling economies in Europe and Asia, the rising dollar has weakened domestic currencies. While weaker foreign currencies should spur export business for countries selling to the U.S. or dollar-denominated markets, for U.S. multinationals that is an upset. For these companies, a stronger dollar not only means that their products become more expensive for foreign customers, but also profits booked abroad convert into dollar for less than they should, crimping gains in the process.

The Eurozone

The rapidly surging dollar could not have come at a more difficult time for the Eurozone. The common currency Euro has struggled against the dollar since the stunning victory of Trump in the U.S. election. So far this month, EURUSD is down more than 3.30%. Experts say Euro could be volatile into 2017 as several European Union member states go to the polls next year. Germany, France and Netherlands have their elections in 2017 and Italy is preparing for constitutional referendum in the coming weeks.

Given how shocking outcomes of Brexit vote and Trump’s victory have rattled markets in Europe, European investors are not taking any more chances and that could explain the uptick in dollar buying. The volatility in the Eurozone saw several forex brokers move to adjust leverages they offer on currency pairs of pound (GBP), Euro and Ruble (RUB) ahead of the U.S. election to protect investors from heavy losses.

China’s yuan almost recording worst month

The stronger dollar is also causing fresh headache in Beijing where the central bank has fixed the yuan multiple times recently. The yuan is now set to record its worst monthly action in more than a year.

Following Trump’s election, investors are betting on increased government spending on infrastructure projects as part of his economic stimulus measures. President-elect Trump also proposed a temporary tax holiday to encourage American companies with profits held in overseas accounts to bring the money back home and invest it in the economy. Expanded fiscal spending and increased money supply because of repatriated offshore cash are expected to cause the Federal Reserve to act more aggressively to avoid inflation.

However, the Fed is widely expected to raise benchmark interest rate at its policy meeting next month.