Hong Kong market strategist: Beware of the end of the US dollar's upward trend

Author: Kelvin Wong, Chief Market Strategist, Hang Seng Bank

Article source: Hong Kong Economic Journal

The rise of the US dollar seems to be driven more by capital flows than by fundamental factors.

The economic policies of President-elect Trump are contradictory. For example, his global tariff policy seems to benefit the improvement of the US trade deficit, but it ignores the possibility of global retaliation against US tariffs, which may cause the US economy to lose more than it gains. However, interestingly, the market in the past two weeks seems to only reflect the positive side of Trump's policies, turning a blind eye to the negative factors and continuously pushing up the value of the US dollar. All of this raises doubts about whether the recent rise in the US dollar is really related to Trump's economic policies.

In the past two weeks, the rise of the US dollar seems to be caused by some short-term market fund operations, unrelated to fundamental factors. Before the US election, the market was concerned that if Trump lost the election, his supporters might launch riots. So, before the election, many investors parked their funds in the US bond market for safekeeping, and even moved their funds out of the United States.

However, when Trump won by a large margin, and even the Republican Party had the opportunity to control both houses of Congress to make a strong comeback, the market's concerns were swept away. This change not only brought back the American capital that left before the election but also caused investors to convert a large amount of US debt into US dollars in pursuit of related investment projects such as Cryptocurrency and certain electric vehicle stocks in the 'Trump trade,' leading to a significant demand for the US dollar in the market at that moment, which is believed to be the main reason for the significant rise of the US dollar in the past two weeks.

Since the rise of the US dollar is not a reflection of fundamental factors, it may be purely influenced by capital flows. With the current US Dollar Index approaching a two-year high, be cautious that its upward momentum may come to an end at any time. Especially when the market calms down and returns to fundamental factors, the high US dollar is likely to face pressure.

As for the question of whether the Federal Reserve will continue to cut interest rates, it is recommended to pay attention to the Thanksgiving holiday sales on the 28th of this month as a measure of the US economy. The October non-farm payroll data released by the US at the beginning of this month showed a dismal increase of only 12,000 jobs. If the Thanksgiving sales are not satisfactory, it will be difficult for the Federal Reserve to halt its rate-cutting pace.