Dollar Could Rise if U.S. Core Inflation Stays Elevated

The U.S. Dollar (USD) has been strengthening, which could negatively impact U.S. exports while boosting imports. This trend, coupled with a widening U.S. trade deficit, suggests that the USD's appreciation could have significant implications for the U.S. economy and inflation. As the Federal Reserve (Fed) continues to monitor inflation trends, the potential for a rising dollar could influence its monetary policy decisions in the near future.



Core inflation, which excludes volatile food and energy prices, has remained relatively high in recent months. In November 2024, the core consumer price index (CPI) increased by 3.3% year-over-year, indicating that underlying inflation pressures persist. This elevated core inflation could impact the Fed's monetary policy decisions, potentially slowing down the pace of rate cuts and increasing long-term interest rates.

A stronger dollar can make U.S. goods more expensive for foreign buyers, potentially decreasing demand for U.S. exports. Conversely, it can make imports cheaper for U.S. consumers and businesses, increasing demand for foreign goods and potentially widening the U.S. trade deficit. This dynamic can have both positive and negative implications for the U.S. economy, impacting consumer spending, economic growth, and inflation.

The incoming Trump administration has proposed policies that could have inflationary effects, such as boosting tariffs on all imports to the U.S. and implementing mass deportations of unauthorized migrants. These policies could further increase core inflation, potentially leading the Fed to adjust its monetary policy stance. For example, economists at the Fed expect inflation to remain about the same this year as in 2024, pushed up a bit by higher tariffs.

In conclusion, a rising dollar could have significant implications for U.S. exports and imports, impacting the U.S. trade balance, consumer spending, and inflation. As the Fed continues to monitor inflation trends, the potential for a rising dollar could influence its monetary policy decisions in the near future. However, the specific impacts can vary depending on various factors, and it is essential to consider these factors when analyzing the potential implications of a rising dollar.