Why the U.S. dollar is strengthening

President-elect Donald Trump has promised to weaken the U.S. dollar as a way to improve the country’s exports to the rest of the world. And yet, the U.S. dollar has appreciated almost 3% since Election Day on the assumption that Trump’s policies may do the opposite of what he intends.

The dollar is getting stronger because people — here and around the world — want more dollars. They’re buying dollars and, because they want certain other currencies less, they’re selling those.

“It’s all about supply and demand of currencies,” said Paul Ashworth, chief U.S. economist at Capital Economics.

So why the interest in U.S. dollars? In general, it’s because investors can make more money with dollars, and a few things are screaming that right now. One (and this might sound odd) is inflation. 

“The October inflation data came in a bit stronger than we were expecting,” Ashworth said.

What happens when inflation sticks around? The Federal Reserve tries to fight it by keeping interest rates high. And what happens when interest rates are high? Investors make more money. So investors want dollars to get in on that. 

The other thing making dollars look good is that other currencies are looking less good.

“In Canada, their economy is slowing down a little more,” said Amarjit Sahota, executive director of Klarity FX. “So they’ve been confident in cutting interest rates more aggressively, and that’s weakened the Canadian dollar.”

So if your neighbor’s grass is a little brown, yours looks a little greener. But one big thing making the dollar look good is the election result.

“Most of the policies that President-elect Trump has talked about, at least in economic terms, are dollar-positive,” said Eric Winograd, chief economist at AllianceBernstein.

That is, of course, despite his desire to weaken the dollar. Trump’s spending plans are expected to increase the deficit. The government will borrow more and pay more to do it. Investors want dollars to get in on that.

The other dollar-growing item? Tariffs.

“If you impose tariffs, we will presumably import less,” Winograd said.

If the U.S. is importing fewer goods from foreign countries, it doesn’t need as much currency from foreign countries to pay for those goods. As a result, demand falls and those currencies weaken.

“And that means that the dollar should appreciate as a result,” Winograd said.

Markets are anticipating all of that, so the dollar has already started its upward move.