US dollar has room to rally further

Investing.com – The US dollar has benefited from the country’s recent election results, and Morgan Stanley (NYSE:) expects more strengthening ahead as the new Trump administration starts to enact its proposed policies.

At 05:40 ET (10:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher to 105.802, its highest level since the beginning of July.

“The final results of the US election have not yet been confirmed, but it seems reasonable to us to think that a Republican sweep appears likely,” analysts at Morgan Stanley said, in a note dated Nov. 11. 

“Our work ahead of the US election framed a Republican sweep as the most positive outcome for the US dollar and we reconfirmed our expectation for a dollar rally” last week.

The bank’s expectation for the dollar to rally is based on three main reasons:

Pricing of tariff risks: Client conversations ahead of the US election revealed a wide range of views on the likelihood of tariffs being implemented. We believe that Republican-proposed policies on tariffs should be taken seriously and, should newsflow confirm their likelihood, we would expect investors to respond by buying USD, particularly against the currencies of economies most affected by any tariffs. 

Better data and higher UST yields: Our US rates team has raised the possibility of higher UST yields into year-end, driven by better data now that the US election is behind us and hurricane season is unlikely to weigh on payroll growth. This would support USD broadly.

Upside risks to USD on fiscal policy: The Morgan Stanley baseline view for fiscal policy changes in a Republican sweep is for an extension of the TCJA, meaning that the impact only occurs in 2026 and does not imply significant fiscal stimulus considering that it simply extends the status quo. Given the limited impact we see, the risks are likely to the upside for the market.

“The sequencing in particular is important. If the prospective administration focuses on tariffs early and also brings forward fiscal support to have an impact in 2025, then we think the USD impact will likely be larger, earlier,” Morgan Stanley added.