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FX Forecasts

The US Dollar Is Rising on Renewed Confidence in the US Economy and Market Fluctuations Ahead of the US Election

October 30, 2024
Jimmy Jean, Vice-President, Chief Economist and Strategist • Hendrix Vachon, Principal Economist

Highlights

  • October was an excellent month for the US dollar, which is now trading at close to late-July levels against many currencies. This rebound was driven in part by improving economic data in the United States, which also tempered expectations about the pace and scale of future interest rate cuts by the Federal Reserve (Fed). The exact opposite was true in August, when the greenback was losing ground due to less encouraging data on the US economy and anticipations of more aggressive monetary easing.
  • This about-face on the state of the economy and the future trend in interest rates has been apparent in other parts of the world—Europe especially—but in the opposite direction. Europe’s economic data was generally more upbeat this summer, while progress on inflation was also slower than in the United States, so there was less expectation of lower interest rates. This drove up the pound and the euro. Things have now shifted as Europe’s economy is showing new signs of slowing, and inflation has come down more quickly in recent months. Confidence is now growing that several key interest rate cuts will be delivered in the eurozone and the United Kingdom by the end of next year.
  • In Canada, many interest rate cuts by the central bank are also expected, which widen interest rate spreads with the United States and weaken the Canadian dollar. The Bank of Canada slashed rates by 50 basis points at its October meeting following three consecutive 25-basis-point cuts. This decision came on the heels of a quicker drop in inflation, giving the Bank more flexibility to relax its monetary policy. The Canadian dollar is also contending with the knock-on effects of low prices for some commodities, including oil.
  • Another tailwind for the US dollar is the upcoming presidential election. Polls are showing Kamala Harris and Donald Trump almost neck and neck, fuelling uncertainty that generally boosts the greenback. The markets seem to have at least partially priced in a Trump victory. If Trump wins and introduces economic stimulus through tax or regulatory relief, it could drive up inflation, delay interest rate cuts and push up the US dollar against other currencies.
  • New tariffs could also have a positive impact on the US dollar. Economic literature generally shows that countries that raise tariffs see their currencies appreciate. Essentially, there’s no way to game international trade in a floating exchange rate regime. Exchange rates will tend to adjust to offset any economic advantage a country might try to gain over the rest of the world.

Main Factors to Watch

  • The US presidential election will be top of mind in the immediate term, and we may need to adjust our forecasts depending on the outcome. For now, our main scenario is one of no major policy change following a Kamala Harris victory. With markets seemingly partially pricing in another Trump term, several currencies may be poised to rise against the US dollar in the coming weeks if our main scenario holds. There’s also the possibility that the election will be so close that we won’t know the winner right away, fuelling more uncertainty that could further benefit the US dollar.
  • Another factor to watch is the health of the US economy. Our forecasts don’t expect growth to stay around 3%. Rather, we’re anticipating a return to around 2% economic growth External link. in the US, which would help bring inflation back to target and keep it there while maintaining a balanced labour market. In this scenario, the Fed would continue its cycle of interest rate cuts, likely bringing the upper bound of the federal funds rate down to 3.00% by the end of 2025. The recent widening of interest rate spreads with several countries would subside, and the US dollar would resume a downward trend. The yen may benefit more from this kind of shift, especially since the Bank of Japan probably needs to hike interest rates further to normalize its monetary policy.
  • The Canadian dollar is currently trading at close to C$1.39/US$ but could end the year near C$1.37/US$ and increase further next year. The loonie will likely benefit from a narrower interest rate spread with the United States, as well as a rebound in some commodity prices, including oil, which we feel is undervalued External link..

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