The dollar strongly appreciated in the wake of the November election, with the indices of the dollar against both major currencies and the currencies of other trading partners rising by 4 percent between the election and the end of 2016. The interest rate on the 10-year Treasury bill also rose during this period by almost 70 basis points, from 1.82 percent to 2.51 percent. 

Exchange rates and interest rates are forward-looking variables, that is, their values reflect not just current conditions but expectations of the future as well. These changes in the last eight weeks of 2016 reflected expectations of policy changes that were advocated by candidate Trump, such as cutting taxes and increasing spending on infrastructure, that would raise interest rates in the United States and, in so doing, would bid up the value of the dollar as foreign investors seek to hold higher-yielding United States assets. Furthermore, candidate Trump’s calling for trade sanctions against major trading partners and proposals for a border adjustment tax would cause the dollar to strengthen as well since currencies typically move to partially offset tariffs.

The decreasing likelihood that these policies will be enacted has contributed to the dollar's decrease since January by 4.4 percent against an index of major currencies. It is noteworthy that these decreases in currency values occurred while there was continued discussion of the Federal Reserve raising interest rates since unemployment and the inflation rate stayed low. The 10-year Treasury bill rate has also declined in response to the decreasing likelihood of the enactment of tax and spending policies that would raise the government’s budget deficit. But this decline has been tempered by the effect of an expected increase in the Federal Reserve’s policy rate (the Federal Funds rate).

For more see this EconoFact post: The Decline in the Dollar by Michael Klein of the Fletcher School at Tufts University and Jay Shambaugh of George Washington University.

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