Published: March 5th, 2025
US ten-year bond yields fell below 4.4 per cent on Monday, the lowest they’ve been since mid December 2024. Money markets suggest forex traders are now looking for two 25bp cuts this year, confirming a growing consensus that America’s economy is slowing down.
Investors also appear to believe that the Trump administration’s efforts to reduce the national debt will pay off.
Elon Musk's Department of Government Efficiency (DOGE) is aggressively seeking out waste and opportunities to cut spending, addressing a toxic spending-income gap that grew to 6.3 per cent of GDP last year. Analysts say the savings identified so far are relatively small, however, and tiny when compared to overall expenditure by Washington.
Bloomberg Economics recently wrote that DOGE’s the likely initial impact of DOGE’s cuts will be to lower GDP growth as soon as the second quarter, and potentially trigger rising unemployment in the second half of the year.
However a note to investors from Apollo Global Management took a more serious tone, warning that ‘near-term downside risks are growing, both to currency markets and the US economy as a whole.’
‘While the incoming data is currently strong, looking ahead we have begun to worry about downside risks.’
The aggressiveness of the DOGE programme has unnerved markets, Apollo analysts added, which could negatively impact US hiring and capital investment decisions.
However, DOGE's bigger message is that Trump is determined to tackle the country's mushrooming debt, a greater source of concern for the longer term. If the Trump/Musk plan succeeds in reducing the deficit, the Treasury will need to issue fewer bonds and rely less on debt. That would mean supply will exceed demand, pushing up the value of existing gilts while lowering the yield (interest) Washington needs to pay out.
Bond yields and the Greenback have a historical correlation, which explains why USD is currently falling against other G10 currencies in parallel with declining bond yields.
In August 2024, markets began betting on a 25-basis point rate cut by the US Federal Reserve are growing as its September meeting loomed closer. Analysts at Deutsche Bank said a consensus was growing for cumulative cuts of 95 basis point by year-end, pressurizing the Dollar and depreciating it to a seven-month low against G10 peers.
On Tuesday 20th August, GBP/USD was trading a third of a per cent higher at 1.2983, while EUR/USD stayed above 1.10 with a further advance of 0.34 per cent to 1.1065. Meanwhile the Dollar index was down 0.40 per cent at 101.98.
In a note to investors, the German bank said forex traders were ratcheting-up expectations for a run of consecutive interest rate cuts, and looking to this Friday’s keynote address to the Jackson Hole Symposium by Fed Chair Jerome Powell for confirmation.
With US inflation settling down to the central bank’s 2 per cent target, an apparent slowdown in hiring, and unemployment inching up, Fed policymakers seemed poised to cut the benchmark interest rate in September from its current 23-year high.
‘Jackson Hole is the key event risk in this calendar cycle,’ Deutsche analysts wrote. ‘Traders are currently pricing-in between 25 and 50 basis points of cuts next month, and a little less than 100 basis points across the remainder of 2024.
Deutsche warned, however, that cumulative cuts of 75 basis points in 2024 was a more realistic estimate, delivered in increments of 25 following each meeting. That would undercut current consensus and slow the Dollar’s descent.
As investors look for confirmation of the Fed’s interest rate plans for Autumn and early Winter, The Jackson Hole Symposium has become the main focus of an otherwise data-light week.
In late July 2024, an analysis of foreign exchange movements by ING Bank pegged recent USD advances to a growing belief amongst traders that Donald Trump is on track win the US Presidential election in November.
In a note to investors, the bank’s FX strategy unit wrote that ‘we have seen USD rally twice recently following events that would seem to improve the chance of a Donald Trump win in the race for the US presidency. The most recent was a favorable Supreme Court ruling’.
Earlier in July, the US Supreme Court ruled that former presidents can expect immunity from prosecution for official acts taken while they were in office (though they can’t expect immunity for unofficial acts).
‘It is now clear that traders perceive a link between Trump and a stronger dollar’.
The ruling means the Biden government’s election interference case against Trump will now head back to a lower court, which will need to decide how, or if, to continue the case. At the very least it seems unlikely to be heard before the election, clearing another hurdle for Trump's return to the White House.
ING analysts said the Trump effect on USD is based on assumptions of lower taxes, higher growth, protectionism measures likely to aggravate inflation, and geopolitical uncertainty.
‘With the momentum seemingly favoring former president Trump’s bid for a second term in the White House, combined with forecasts that the Republican Party will take control of both the Senate and the House of Representatives, traders are now looking for reduced immigration, increased tariffs, and lower taxes. The combined impact if these measures could lead to higher inflation, bigger deficits, and more activist policy by the US Fed.’
The Trump effect extends beyond fiat markets. Earlier in the election campaign, when the two major parties were conducting primaries to choose their respective Presidential candidates, then-contender Ron Desantis made a notable about-face on crypto policy.
He told supporters at a political rally that he would end the US government’s 'campaign of harassment’ against the crypto industry, signing a pro-Bitcoin decree on his first day in office if elected to the White House. The move was widely read as an appeal to Trump voters, who tend to be pro-crypto.
