How long will the USD remain strong this time? - Commerzbank

Towards the end of last week, the USD rally seemed to have run out of steam. For the time being, EUR/USD seems to be stabilising just above 1.05, which is around 6.5 cents below the interim high at the end of September. This should come as no surprise to anyone. In 2016, the US dollar also experienced temporary sideways movements in the weeks following Donald Trump's election victory. And this time around, the victory probably came as less of a surprise to the market, as the polls had already pointed to it and the US dollar had already appreciated quite a bit before the election. It is therefore likely that much of the USD's initially justified strength has now been priced in, Commerzbank's FX analyst Michael Pfister notes.

EUR/USD seems to be stabilising just above 1.05

"As a result, market participants are likely to turn their attention in the coming weeks to the question of how long the USD strength will last this time around. As a reminder, in 2016/2017 the US dollar also appreciated significantly after the election, but quickly lost this strength in the months following Trump's inauguration. This was probably mainly due to the fact that Trump did not immediately implement his trade policy, which he had already announced at the time, but the tariffs and the trade war only picked up speed in 2018/2019. Then the dollar rebounded."

"I am not saying that history will repeat itself. After all, Trump is likely to be much better prepared this time around, as evidenced by his rapid personnel decisions. But is he so well prepared to implement an inflationary trade policy from day one? Especially if he also wants to impose high tariffs on long-standing allies, I have my doubts that this can be implemented quickly (not to mention the fact that our economists generally doubt that the tariffs will be that high). That's not to say it won't be implemented, just that it could take a bit longer, similar to 2018/2019. Therefore, I think a breather in USD strength is not unwarranted."

"Of course, if it becomes (even) clearer that Trump wants to push through his policies quickly, this could change. However, I am not so much thinking of (even) more USD strength. Rather, I think the euro would suffer. Although the euro has depreciated quite a bit in the aftermath of the election, there is certainly potential for a much weaker euro if tariffs go ahead. Until then, however, the market is likely to wait for further signs that Trump is serious."