In the aftermath of Donald Trump’s convincing re-election victory, the U.S. dollar has flexed its muscles, appreciating more than 3% against a basket of its major trading partners. Interestingly, this post-election rally bears a striking resemblance to the greenback’s trajectory following Trump’s maiden presidential triumph back in 2016.
This time around, however, the script may deviate. The DXY Index, which gauges the dollar’s value against key currencies like the euro, yen, and pound, shows no signs of peaking. Trump’s proposed economic policies coupled with the Federal Reserve’s likely interest-rate stance are set to provide tailwinds for the dollar’s ascent.
The Trump Effect: Deja Vu for the Dollar?
Cast your mind back to 2016. As Trump basked in his surprise electoral success, the DXY Index rallied hard, peaking in December before gradually losing steam over the ensuing 12 months. Coincidentally, this period of dollar weakness overlapped with Bitcoin’s epic 2017 bull run.
Fast forward to the present day, and the parallels are uncanny. Since the 2024 election, the dollar index has surged over 3%, matching its post-election performance from eight years prior. Yet, there are compelling reasons to believe that history won’t repeat itself verbatim.
Decoding the Dollar’s Dominance
Several factors are conspiring to cement the dollar’s strength in the coming months:
- Trump’s Trademark Tariffs: The President-elect has vowed to slap levies on major trading partners, potentially stoking geopolitical uncertainty and bolstering demand for the safe-haven greenback.
- U.S. Economic Outperformance: Robust GDP growth north of 3% and stubbornly high inflation are likely to keep the Fed in a hawkish mood, supporting the dollar.
According to Bitwise’s European head of research Andre Dragosch, the Fed finds itself between a rock and a hard place:
“Either risk a U.S. recession by doing too little, too late or risk a significant acceleration in inflation again.”
– Andre Dragosch, Bitwise
Implications for Bitcoin
Conventional wisdom dictates that a muscular dollar bodes ill for risk assets like Bitcoin. Indeed, BTC is currently trading about 10% below its mid-December peak near $108,300. If the dollar extends its rally, it could sap some of the momentum from Bitcoin’s post-election surge.
However, it’s not all doom and gloom for the crypto king. Trump has previously expressed his support for Bitcoin, and his re-election initially ignited a fresh bull run. Moreover, Bitcoin’s status as an inflation hedge and its growing mainstream adoption could help it weather a rising dollar.
The Bottom Line
All eyes will be on the interplay between the dollar, Bitcoin, and the broader financial markets as Trump’s second term gets underway. While a buoyant buck may create some headwinds for BTC, the world’s largest cryptocurrency has repeatedly shown its resilience in the face of adversity.
As the old adage goes, history doesn’t repeat itself, but it often rhymes. The dollar’s déjà vu rally and Bitcoin’s bumpy ride promise to keep investors on their toes in the months ahead. Buckle up, it could be a wild ride.
