The dollar surged by its most since the 2016 Brexit referendum and Wall Street was poised for big gains as Donald Trump’s historic US election victory sent investors around the world scrambling to price in a new regime of trade tariffs and tax cuts.
The US currency raced higher against the euro, the yen and the pound on Wednesday as traders returned to so-called “Trump trades” in expectation that the president-elect’s plans on tariffs and taxes would boost stocks, push up inflation and reduce the pace of interest rate cuts.
Wall Street was also on course for firm gains at Wednesday’s open, with futures on the S&P 500 index climbing 2.3 per cent and the Nasdaq 100 up 1.7 per cent.
“The Trump trade’s back on,” said Francesco Pesole, a currency strategist at ING. “It looks like markets are pricing in a clean sweep or close to it,” referring to a so-called red wave scenario where the Republicans also emerge with control of both houses of Congress. Such an outcome would further feed dollar strength, he said.
In a sign of the bullish sentiment the Vix, Wall Street’s measure of expected volatility in stock prices, fell to its lowest level since September.
Stocks are rallying “because investors dislike uncertainty more than any candidate”, said Luca Paolini, chief strategist at Pictet Asset Management.
US and European bond markets moved in opposite directions, as investors bet that tariffs would hit growth in Europe at the same time as Trump’s economic package boosts the US economy.
The yield on the 10-year Treasury traded 0.18 percentage points higher at 4.47 per cent, its highest level since July, while the yield on German Bunds fell 0.03 percentage points to 2.41 per cent. Yields move inversely to prices.
“European growth, which was likely challenged to begin with, could get worse if a trade war actually materialises and the [European Central Bank] may need to diverge from the Fed[eral Reserve] as a result,” said Robert Dishner, senior portfolio manager at asset manager Neuberger Berman.
The yield on the US 30-year “long bond” reached 4.68 per cent with its biggest daily move in more than a year.
The dollar index, a measure of the currency against a basket of rivals, was up 1.9 per cent, recording its biggest one-day gain since June 2016. The pound was 1.5 per cent lower against the dollar at $1.285, while the euro fell 2.2 per cent to $1.069.
Meanwhile, the prospect of tariffs and looser US regulation knocked renewable energy stocks and European car manufacturers while lifting US banks.
“The market is responding to a potential ‘red wave’, but the challenges will come later,” said Andrew Pease, global head of investment strategy at Russell Investments.
“The risk is that investors are too sanguine about the prospects of further tariffs and a renewed trade war, given that the economic impact of the trade war under Trump [in his first term] was relatively limited.”
Bitcoin was up 8 per cent, hitting a record high of $75,389, making the world’s largest cryptocurrency one of the biggest movers across markets, before falling back slightly. Trump has positioned himself as the pro-cryptocurrency candidate, pledging to make the US “the bitcoin superpower of the world”. Cryptocurrency exchange Coinbase jumped 12.7 per cent.
Futures linked to the Russell 2000, a gauge of US small-cap stocks, rose 5.9 per cent, as some investors predicted a broader rally.
A red sweep could create a “high-octane” US economy that drives global equities higher over the next year “as earnings expand and margins remain high”, said Samy Chaar, chief economist at Lombard Odier. He pointed to financial and defence stocks as likely winners.
In currency markets, the euro was the weakest of the G10 currencies on the day over the prospect of tariffs hitting export-dependent economies.
The Mexican peso, which is seen as particularly vulnerable to Trump’s plans to slap tariffs on imports into the US, fell about 2.6 per cent to 20.63 pesos to the dollar.
The yen, meanwhile, weakened 1.7 per cent to ¥154.3 to the US dollar. The steep declines in the yen drove a rally in Japan’s export-focused stock market, with the Topix up 1.9 per cent.
Chinese markets fell. Hong Kong’s Hang Seng index dropped 2.2 per cent, led lower by mainland Chinese companies. The offshore renminbi, for which the People’s Bank of China does not set a daily fixing rate, weakened by 1.1 per cent against the dollar, while the onshore equivalent fell 0.8 per cent.
Currencies viewed as “China proxies” because of their exposure to its economy also weakened, with the Australian dollar down 1.2 per cent at $0.656.
“Trump’s tariffs . . . if he goes ahead, have the potential to cause a huge amount of pain,” said Ray Attrill, global co-head of forex strategy at National Australia Bank in Sydney.
Companies expected to do well out of a Trump victory surged. Tesla jumped 14.9 per cent in pre-market trading on bets that prominent Trump backer Elon Musk will benefit from the former president’s re-election. The Tesla chief has backed the Republican to avoid “strangulation by overregulation”.
