Dollar Declines as Donald Trump Begins Second Term

The dollar has started to fall, and stock markets are cautiously positive as investors prepare for the anticipated policy announcements that will follow Donald Trump’s inauguration for a second term. This shift comes as traders also keep an eye on the likelihood of a rate hike in Japan later this week.

Trump is scheduled to take the oath of office at noon Eastern Time (1700 GMT), and he has promised a "brand new day of American strength" during a rally held on Sunday, January 19.

Anticipation of New Policies

With expectations high, many anticipate a wave of executive orders from Trump as soon as he takes office. Adding to the sense of unpredictability, Trump recently launched a digital cryptocurrency token on January 17, which briefly soared in value before experiencing a significant drop, illustrating the volatility in market reactions.

Since Monday is a holiday in the U.S., any immediate effects on the financial markets will likely be seen first in foreign exchange, followed by activity during Asian trading hours on Tuesday.

“The pullback in Treasury yields has provided support for equity markets, particularly in Europe,” noted a report from the Edmond de Rothschild Group.

With shorter-term bond yields in the euro zone stabilizing by the morning of January 20, market dynamics are shifting. The chief FX strategist at Societe Generale, Kit Juckes, indicated that Trump’s policies are dictating the direction of the markets and pointed out that trading positions betting on the dollar's rise against other currencies have now hit their highest levels since 2022.

The dollar has gained over 8 percent against the euro since September and is currently trading at $1.0309, close to a two-year peak. However, some analysts believe that a more gradual approach to implementing U.S. tariffs could lead to a decrease in some traders’ activities.

Potential Tariffs Loom

Trump has threatened to impose tariffs as high as 10 percent on global imports and up to 60 percent on goods from China. Additionally, he has proposed a 25 percent import surcharge on products from Canada and Mexico. Trade experts warn that such duties could disrupt trade flows, escalate costs, and provoke retaliatory measures from other countries.

In the cryptocurrency market, Bitcoin rose by 4 percent, reaching a new record of $108,943, while Trump’s newly launched cryptocurrency, known as $TRUMP, briefly soared to nearly $12 billion in market value, attracting significant trading volume. Meanwhile, Melania Trump's cryptocurrency, launched on January 19, achieved a market cap of $1.9 billion.

Focus on China

China is positioned to be a primary target for the planned trade tariffs. Investors reacted positively to better-than-expected growth data from China and a recent phone conversation between Trump and Chinese President Xi Jinping, where both leaders expressed optimism.

Hong Kong’s Hang Seng Index rose by 1.8 percent, and the Chinese yuan showed signs of strengthening. “Everyone is waiting for the start of trade negotiations to see how Xi Jinping will approach Trump,” commented Ken Peng, head of Asia investment strategy at Citi Wealth, during an outlook briefing in Singapore. He acknowledged that the relationship between the two leaders is crucial as it serves as a significant indicator of potential policies.

The yuan is expected to make gradual adjustments in response to any changes in trade policy and recently reached a two-week high against the dollar at 7.3088. The Japanese yen also saw gains last week as remarks from Bank of Japan officials hinted at a likely interest rate hike. As of this articles' reporting, the yen stood at 156.335 per dollar, with market expectations indicating an 80 percent chance of a 25 basis point rate increase at the upcoming meeting.

Dollar, Trump, Tariffs