BofA notes that the USD’s post-election appreciation in 2024 resembles the 2016 reaction, with similar DXY gains of around 2.8% against G10 currencies, albeit with stronger alignment to rate differentials this time. In 2016, the USD showed a greater excess premium over rate differentials, but today’s movements reflect shifts in relative growth and policy expectations. Upcoming trade policy clarity could add to USD strength if tariffs exceed expectations.
Key Points:
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Comparative USD Appreciation: USD gains post-2024 election mirror 2016’s, with a similar DXY move (~2.8%). However, rate differentials explain more of the current USD strength compared to 2016’s excess premium.
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Rate Differential Impact: The DXY-weighted 2-year sovereign spread has widened by 19bps, compared to 12bps in 2016, indicating that today’s USD rally is more in line with interest rate spreads and growth expectations.
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Trade Policy Uncertainty: Unclear trade policy specifics create scope for additional USD upside if tariffs exceed expectations, adding a risk premium to current USD levels.
Conclusion:
BofA sees the USD’s 2024 post-election trajectory closely following 2016’s pattern, with USD strength well-supported by rate differentials and growth dynamics. If anticipated trade policies lean more aggressive, additional USD appreciation may follow, reinforcing bullish sentiment in the near term.
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