Unlock the White House Watch newsletter for free
Your guide to what the 2024 US election means for Washington and the world
The US dollar touched its strongest level in six months while Treasury yields jumped sharply higher on Tuesday as investors focused on the risk of a resurgence in inflation during a second Donald Trump presidency.
The dollar index, which tracks the US currency against a basket of peers, rose as much as 0.6 per cent to its highest level since May, and by Tuesday evening was up 0.4 per cent for the day.
The yield on the benchmark 10-year Treasury, which rises when prices fall, leapt 0.11 percentage points to 4.42 per cent, close to the highs hit in the immediate aftermath of last week’s election. The two-year yield, which is more sensitive to short-term interest rate expectations, rose 0.08 percentage points to 4.34 per cent.
Investors have scaled back their expectations for how quickly the Federal Reserve will cut interest rates since Trump’s decisive victory because of fears aggressive tariffs could drive up prices or that tax cuts and other pro-growth policies could cause the economy to overheat.
Futures markets on Tuesday were pricing in about a 62 per cent chance of the Fed announcing a third consecutive interest rate cut at its next policy meeting in December, down from roughly 81 per cent immediately before last week’s election.
The Bureau of Labor Statistics will publish its latest consumer price inflation report on Wednesday morning.
Neel Kashkari, president of the Minneapolis Fed, told a conference on Tuesday that “inflation surprises . . . might give us pause” ahead of the central bank’s next meeting.
Win Thin, global head of markets strategy at Brown Brothers Harriman, predicted in a note the Fed would “continue to take a cautious tone going forward, especially in light of what we view as heightened inflation risks in a second Trump term.”
Ian Lyngen, head of US rates strategy at BMO Capital Markets, said markets were “refocus[ing] on the potential for inflation to, once again, define the agenda going forward”.
Tuesday’s market moves also followed reports that highlighted the prospect of a more aggressive foreign policy, including potential tariffs. People familiar with the matter say Trump is planning to appoint Marco Rubio, a noted Iran and China hawk, as secretary of state, and Florida Congressman Mike Waltz — another China critic — as national security adviser.
The Republican party is moving closer to confirming a sweep of both houses of Congress, giving Trump more leeway to push through big tax cuts or tariffs.
The rising yields weighed on US stocks, which pulled back slightly after a strong rally over the past week. The S&P 500 slipped 0.3 per cent, while the Nasdaq Composite shed 0.1 per cent.
European stocks suffered sharper declines, with the continent-wide Stoxx 600 falling 2 per cent for its worst one-day performance since the market volatility of early August. Paris’s Cac 40 finished down 2.7 per cent, while Frankfurt’s Dax shed 2.1 per cent.
Trump has threatened 60 per cent tariffs on Chinese imports to the US, and blanket 10 per cent to 20 per cent duties on all other trading partners.
Investors are concerned European manufacturers will suffer a double hit of US tariffs on exports and the possibility that China floods the region with cheap imports that undercut domestic companies, particularly carmakers.
Tomasz Wieladek, chief European economist with T Rowe Price, said: “The rest of the world is being squeezed. Europe is being squeezed here. China is also going to be hurt quite a bit as it has been singled out as the main tariff target.”
“It is almost like a redistribution of the rest of the world’s growth into the US economy,” he said.
Copper, viewed as an indicator of global economic health, fell nearly 2 per cent in London as traders feared commodities would bear the brunt of possible Trump tariffs.
Kelly Ke-Shu Chen, an analyst with DNB Markets, said Rubio’s stance would undercut the prospects for “any form of dialogue” between the US and China.