Here’s Why The Dollar Surged To 4-Month High After Trump Win

The U.S. dollar index (DXY), which tracks the American currency’s exchange rate against a basket of six other developed market currencies including the euro and the Japanese yen, rose 1.8% to about $105.30 by around 8 a.m. EST, registering its highest level since early July.

And bond yields spiked with the benchmark 10-year Treasury rising 16 basis points to a four-month high of almost 4.5%, the largest daily jump in 10-year yields since April; higher bond yields point to a fixed income selloff as investors demand higher annual payouts to hold government debt.

The dollar’s rise is partially a reflection of the protectionist trade policy endorsed by Trump and the Treasury is in part a result of investors moving money into riskier assets (see the early stock market gains), but there’s also a more pessimistic reason for the movements.

“Correct or not, the market views Republican control of Washington as negative for the debt and deficits,” wrote Sevens Report founder Tom Essaye in a Wednesday note to clients, alluding to Trump’s victory and Republicans’ projected majority in the Senate and lead in the House race.

If this climbing debt is in fact the case, coupled with concerns about the impact on goods’ prices due to tariffs, inflation could remain elevated for longer than previously expected, which in turn would likely cause the Federal Reserve to pump the brakes on its interest rate cutting cycle kicked off in September, with optimism about robust economic growth under Trump similarly pushing out monetary policy expectations, as stimulatory rate cuts are less necessary with strong economic conditions.

So, lessened rate cut expectations push up bond yields as traders price in interest rate cuts closer to today’s 4.75% to 5% in the medium and long run, and higher expected rates simultaneously drive up the value of the dollar as the likelihood of cheap borrowing costs in low-rate environments decreases.