In the fourth quarter, two highly significant international variables are the U.S. election and interest rate decisions. Trump defeating Kamala Harris signals a return of policies that support a low-interest environment to aid corporate growth and a moderate depreciation of the dollar. With the Federal Reserve's anticipated rate cut, will the dollar soon weaken?

In conclusion, the dollar may indeed weaken under Trump’s policies; however, since he will officially take office in January 2025, and given that the current rate cuts may be reduced due to inflation recovery, the dollar will likely maintain relative strength for now. This is a significant factor contributing to the rise in long-term U.S. Treasury yields. As circumstances reverse, one might see trends of dollar depreciation and falling Treasury yields.

Even though the Fed maintains a downward trend in rates, the extent of cuts may notably decrease. Trump's tax policies may lead to substantial fiscal deficits, coupled with anticipated increases in private consumption and corporate investment. The expected average inflation rate in the U.S. over the next five years, which bottomed at 1.86% on September 10, has swiftly climbed to 2.46% by early November. If inflation exceeds or approaches 2.6%, it will create pressures on the Fed, making steep cuts less likely.

Through the CME’s rate futures, we can infer the potential future trends in benchmark interest rates. Market assumptions show that shortly after the first rate cut, as of October 7, expectations for the benchmark rate by the end of 2024 are around 4.465%, dropping to about 3.35% by the end of 2025. However, following the recovery in inflation and Trump’s election, projections adjusted by November 8 suggest the 2024 rate might be 4.51% and 3.78% for 2025, reflecting a difference of 0.43 percentage points compared to data from October 7. This is reflected in the rising dollar and U.S. long-term Treasury yields.

Interest rate arbitrage may return, promoting depreciation of the Japanese yen as investors borrow low-interest yen to invest in higher-yielding dollars or U.S. Treasuries. As Japan’s political landscape stabilizes with Shigeru Ishiba’s continued premiership following the November 11 elections, political risks ease, favoring the continuation of yen depreciation trends. Investors considering that the yen may be excessively undervalued or that the Japanese government might intervene in the foreign exchange market can look into the CME’s yen futures (product code: 6J) as a low-cost and highly liquid tool. However, be mindful of subsequent changes in U.S. economic data to avoid unexpected volatility risks.