How will the US dollar move if Trump wins again?

>> What could squeeze the US dollar much higher?

However, he spent four years in office between 2017 and 2021 disliking dollar strength and achieved very little. Could a second term bring any more success?

In a recent Bloomberg interview, Republican presidential nominee Donald Trump bemoaned US dollar strength, particularly against the yen and the renminbi. This sets up the possibility that he may try to do something about it should he win a second term on November 5th. But what can a president do? Foreign exchange intervention is an obvious answer but there are a couple of problems here.

The first is that intervention that lack monetary policy back-up can be quite ineffective. What do we mean by this? We mean that countries looking to weaken their currency allow monetary conditions to ease, while those seeking currency strength permit monetary tightening. The first problem is that intervention policy usually belong to governments, while monetary policy belongs to the central bank. This immediately creates the risk that one side just counterbalances the other.

But in fact, even if both sides seem to be working in harmony, as we see in Japan with yen-buying intervention and monetary policy tightening, the outcome might still not be the one that’s desired. Could Trump experience similar problems if he instructs the Treasury to intervene via the Fed?

Possibly not, for there is undoubtedly something different about the US when it comes to FX intervention. For a start, it happens very rarely and secondly, most see a currency like US dollar/yen as being the primary responsibility of the US which is why other countries undertaking intervention often have limit ed success if the Fed does not join in. When the Fed has joined in, such as during the early-to-mid 1990s when dollar/yen was very weak, it managed to effect a significant rally in the US dollar.

In short, if Trump were to enter office and if the Treasury/Fed were to intervene in US dollar/yen, or the US dollar more generally, it would have a significant effect, although that’s assuming the Fed complements the intervention with easier monetary policy. However, there is one further difficulty, which is that collaboration at the G7 or G20 level includes the commitment that FX intervention is not undertaken for competitive gain. Then again, Trump does not seem to care too much for such multilateral agreements.

>> Major currencies could be more volatile around election time

So far, we’ve concluded that US intervention could lower the US dollar, although it would probably have to be accompanied by a consistent monetary policy, meaning Fed easing or, at least, Fed stability. But herein lies the rub because most see Trump’s policies in areas such as tariffs, migration and tax cuts as pushing the Fed towards tighter policy, not looser policy. This could mean that the Fed just throws money away if it intervenes to lower the dollar while hiking rates at the same time.

In the end, what’s likely to happen? Perhaps the answer is to be found in the reasons why Trump does not like a strong US dollar. Unsurprisingly, it is because he feels it damages US competitiveness. This desire to compete is part of the reason why Trump wants still more tariffs – of up to 100% on China - as he suggested in the Bloomberg interview. If these measures lift import prices and make domestic firms more competitive, then it can be argued that these tariffs do the work of a lower US dollar, and hence intervention may not be needed.

However, Steve Barrow, Head of Standard Bank G10 Strategy said if the tariffs help lift inflationary pressure – and US rates – the US dollar is actually likely to rise and offset any competitive gain from tariffs. In the end, there are probably too many unknowns here for the market to price in right now. “We don’t know whether Trump will win, whether new tariffs will be announced, or whether there will be FX intervention. But as the answers become clearer, starting in November, the US dollar could start to move,” said Steve Barrow.