The U.S. dollar held firm near a six-and-a-half-month high against major currencies on Wednesday, while Bitcoin remained close to its all-time peak as investors weighed the impact of the so-called “Trump trade” ahead of key U.S. inflation figures later in the day.
The dollar has been buoyed by expectations of inflationary policies under Donald Trump’s presidency, with markets pricing in tax cuts and trade tariffs from the incoming administration. These policies are seen as likely to increase inflation, thus supporting the value of the dollar.
The “Trump trade” has also pushed up U.S. Treasury yields, with markets betting that the Federal Reserve may scale back its expected interest rate cuts in response to rising inflation pressures. With the Republican Party projected to control both houses of Congress when Trump takes office in January, he is expected to pursue an agenda of tax reductions and cuts to federal government spending.
The U.S. dollar index, which tracks the greenback against a basket of other major currencies, added 0.02% to 106.01, staying near its highest level since May 1, when it peaked at 106.17. Meanwhile, Bitcoin paused its upward trajectory, dipping 0.23% to $87,105.05, after reaching an all-time high of $89,998 on Tuesday. Trump’s pledge to make the U.S. “the crypto capital of the world” continues to provide support for Bitcoin’s bullish momentum.
U.S. Inflation Data in Focus
Traders’ attention is now focused on the release of the October U.S. Consumer Price Index (CPI) report later on Wednesday. Analysts expect the core CPI to rise by 0.3%, but any figure above that could further dampen expectations of a rate cut from the Federal Reserve in December.
“The focus is likely to shift back to inflation and Fed policy in the latter part of the week, but whether this will result in a reversal of the Trump trade remains to be seen,” said Charu Chanana, Chief Investment Strategist at Saxo Bank.
There is also growing uncertainty about the Federal Reserve’s future actions, particularly if inflation rises further under the new administration. Higher inflation could limit the Fed’s ability to continue cutting interest rates.
Currently, markets have priced in a 60% chance of a 0.25% rate cut by the Fed in December, down from about 84% a month ago, according to CME Group’s FedWatch Tool.
Fed Officials Keep Options Open
Comments from Federal Reserve officials on Tuesday further added to the uncertainty. Both Minneapolis Fed President Neel Kashkari and Richmond Fed President Thomas Barkin signaled that they were not yet ready to decide how quickly or by how much the central bank should reduce rates. Federal Reserve Chairman Jerome Powell is scheduled to speak on Thursday, ahead of the release of U.S. Producer Price Index (PPI) data and retail sales figures later in the week.
Euro Struggles Amid Political Uncertainty
The euro remained under pressure, weighed down by political uncertainty in Germany and the broader eurozone. Germany, Europe’s largest economy, is set to hold elections on February 23, following the collapse of Chancellor Olaf Scholz’s governing coalition. Additionally, concerns about potential tariffs from the Trump administration on European goods and services have added to the euro’s struggles.
The euro was last down 0.05% at $1.061875, hovering just above a one-year low of $1.0596 hit on Tuesday.
British Pound Remains Flat Amid Stronger Dollar
The British pound held steady at $1.2746, under pressure from the broadly stronger U.S. dollar. Meanwhile, Japan’s wholesale inflation accelerated in October due to a weaker yen, which pushed up the cost of imports, complicating the Bank of Japan’s policy decisions regarding interest rate hikes.
The dollar gained 0.17% against the yen, rising to 154.88 after briefly touching 154.934, its highest level against the Japanese currency since July 30.
Australian Dollar Remains Under Pressure
The Australian dollar, sensitive to the economic outlook for China, continued to face pressure, slipping 0.02% to $0.6531. Wage growth in Australia slowed to its weakest pace since late 2022 in the third quarter, partly due to an influx of new workers and easing inflation. This has bolstered the case for the Reserve Bank of Australia to consider cutting interest rates further.
