Although Republicans would gain a majority of at least 52 to 48 in the US Senate, ultimate control of the lower house was still unclear and the counting of votes was still underway.

Brad Bechtel, global head of FX at Jefferies, believes the dollar could rise another 5% in a Red Sweep scenario and rise further in the coming months as more of Trump’s agenda is implemented.

Trump will be inaugurated on January 20.

In 2016, the dollar rose about 6% against a basket of currencies in the first two months after Trump’s election victory, but gave up those gains in the following months. The dollar rose about 13% between February 2018 and February 2020, as Trump imposed tariffs on several countries, including China and Mexico.

WRINKLE EFFECTS

A rising dollar could be a double-edged sword for the U.S. economy, reducing inflation while hurting the competitiveness of American products abroad. It could also put pressure on the profits of multinational US companies that need to convert their foreign profits into dollars.

A JPMorgan study shows that every 2% increase in the trade-weighted dollar deviates 1% from the S&P 500’s earnings growth, JPMorgan strategists said.

Should a rising dollar become a headwind for growth, Trump could urge the Fed to cut rates or push U.S. trading partners to boost their own currencies.

Trump could also tap the Exchange Stabilization Fund, which was created in the 1930s as a tool to stabilize the exchange rate and now has about $215 billion. Trump did not use the fund during his first term, and analysts are skeptical about how effective such a measure would be in reining in the dollar without global efforts or support from the Fed.

“Trump’s preference for a weaker dollar would have to be accommodated by and in coordination with the Federal Reserve, which we view as unlikely,” Wells Fargo analysts wrote in a Wednesday report.

Given the dollar’s role as a linchpin of the global financial system, the continued strength of the U.S. currency could ripple out to other assets.

A strong dollar could be particularly unwelcome for emerging countries, especially those that have borrowed heavily in the US currency, as a rising dollar would make it harder for them to repay their debts.

That could put pressure on central banks in those countries – as well as some developed countries such as Japan – to raise interest rates in an effort to defend their own currencies, Jefferies’ Bechtel said.

“You are going to join this new regime of currency war that has flared up from time to time in the past,” he said.

Some investors believe tariffs could ultimately hurt the U.S. economy because they could raise costs for businesses and consumers, disrupt supply chains and reduce trade volumes. All of that could reduce the prospects for a stronger dollar down the road.

A Deutsche Bank study shows that tariffs, if implemented, would shave about a quarter of a point off U.S. gross domestic product.

“The reality is that a full-fledged flight protectionist agenda will ultimately rebound on the U.S. economy and slow growth,” said Karl Schamotta, chief market strategist at payments firm Corpay.

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Leslie Adler)