Strong US dollar strikes again! Is it all because of the "Trump trade" this time?

The US dollar against a basket of currencies has risen to its highest level since August, thanks to a recent series of strong economic data and investors betting on the increasing possibility of former US President Trump winning the next month's presidential election.

Since late September, the US dollar has risen by nearly 4%, with strong US employment data earlier this month prompting investors to lower their expectations of a Fed rate cut.

However, traders and analysts say that the increased likelihood of Trump's re-election has added fuel to the dollar's rally, as it is expected that the former president's plans to impose tariffs on imported goods will boost inflation and interest rates after his victory on November 5.

Lee Hardman, senior currency analyst at Mitsubishi UFJ Financial Group, said, "The market is adjusting to reflect the greater likelihood of Trump returning to the White House."

With the increased probability of Trump's victory, the US dollar has rebounded significantly.

Trump has expressed a desire to weaken the US dollar, but investors have long believed that his economic policies will have the opposite effect, especially if Republicans succeed in achieving a "red wave," winning the White House and both houses of Congress.

Citigroup said that its hedge fund clients have been encouraged by the changing odds of the US election and have been buying the US dollar for several consecutive days this month, marking the longest inflow of funds in two years. Barclays stated that there is a clear "election premium" on the US dollar, adding that the shift in Fed expectations alone is not enough to explain the recent rise in the US dollar.

Thierry Wizman, global foreign exchange and interest rate strategist at Macquarie, said that there are two "pillars" supporting the recent strength of the US dollar. The first is what he calls the "resurgence of American exceptionalism," manifested in strong economic data, and the second is signs of the so-called "Trump trade."

Wizman stated that Trump's economic policies "tend to be associated with higher inflation, so they tend to be associated with a more moderate rate-cutting cycle by the Fed in the coming years."

In recent years, the Fed's expected slowdown in rate cuts has also led to selling pressure on long-term US bonds, with the 10-year US bond yield rising to 4.22% on Tuesday, its highest level since July.

The forward market expects the Fed to cut rates one to two more times this year, which means the Fed may "stand pat" at one of the remaining two meetings. Last month, investors had expected the Fed to cut rates by at least 25 basis points at each of the remaining meetings this year.

This shift comes just a month after the Fed began lowering borrowing costs from a 23-year high, causing traders to rush to adjust their positions. The ICE BofA Move index, which measures volatility in the US bond market, has risen to its highest level since the end of last year.

However, as the outcome of the US election is still seen as very close, other analysts say that most investors are currently unwilling to bet on the outcome Tim Baker, Head of FX Research for the Americas at Deutsche Bank, said he believes that a Trump victory would "be positive for the US dollar, but we think this is a future event."

Mark McCormick, Global Head of FX and Emerging Markets Strategy at TD Securities, stated, "The election essentially has two outcomes, but both sides have significant tail risks."