What will happen to the US dollar if Trump wins again?

>> The pressure from rising US dollar continues to fall

All the uncertainty surrounding the course of Fed policy is, perhaps surprisingly, still leaving the US dollar pretty unmoved against most major currencies. Only the yen is really weak against the US dollar, but so too is it weak against other currencies as well. In real – inflation adjusted – terms the US dollar has actually fallen slightly over the past year on the BIS’s measure of the US dollar against 27 other currencies. If monetary policy is not doing it for the US dollar, what will?

Politics is an obvious choice given the US presidential election in November, for the outcome of the vote could well dictate the next significant directional move for the US dollar. But how can the market price in the possibility of another term for Republican candidate Trump?

Steve Barrow, Head of Standard Bank G10 Strategy, said it is so uncertain that the market probably won’t bother. Instead, what is likely to happen is that the entirety of the market’s reaction to the election will come once the result is known, not beforehand. It means that traders and investors need to be primed for how the market might react to the election outcome, and that, understandably, involves trying to understand the consequences of the policies that Trump might pursue if he gets the keys to the White House.

“It seems to us that there’s lots of focus on trade, given Trump’s consideration of a 10% across-the-board tariff on imports, with an extra special rate of up to 60% being talked about for China. There’s also a good deal of focus on taxes given his wish to have the temporary 2017 personal tax cut made permanent. A number of other issues have come up just recently, including talk that a Trump administration might seek to devalue the US dollar, or undermine the independence of the Fed. But the one we want to focus on, that might potentially be the most important, is the policy towards immigration. It is not just that Trump is planning a quite draconian expansion of the policies pursued during his first term, which includes mass deportations of potentially millions of undocumented migrants. It is that the surge in immigration we’ve seen since he left office may be the reason why the US economy and labour market have remained robust in the face of sharp rate hikes from the Fed”, said Steve Barrow.

>> Various scenarios for the US dollar

The actual data on net immigration and projections for 2024 reveal a dramatic surge, not just relative to the period Trump was in office, but compared to prior years as well. The Congressional Budget Office (CBO) puts the influx at 3.3m in 2023 which is about double its prior estimate and a similar rise is penned in for 2024.

Such an influx has clear benefits, especially when the labour market is tight as those migrating to the US tend to take the lower-paid jobs that mitigates pressure on firms to lift wages in order to attract, less enthusiastic local workers. Hence immigration could be keeping wage growth down. It may also mean that payroll rises can stay well above the 100k per month that Fed Chair Powell cited some time ago as being consistent with population growth. It is also notable that productivity growth has been very strong in the past year, or so, which has had many scratching their heads but, here too, strong immigration may offer the answer. But there may be downsides to strong immigration as well, such as strains on the rental stock, which could be one reason why shelter prices within the CPI figures remain quite elevated.

Nonetheless, Steve Barrow said high net immigration has been a boon to the US, especially at a time when the labour market is so tight. It is possible that the labour market will loosen sufficiently so that mass deportations, if undertaken by Trump, will have no bearing on things like wages and hence inflation. But we would not be so sure.

“The immigration is one issue, like many others, such as tariffs, that threatens to keep inflation far too high. The corollary of this is that it may mean higher US rates for much longer and that, in turn could mean a much stronger US dollar. As we said before, we do not anticipate the market will pre-empt such strength by driving the US dollar up into the election result, but traders and investors may well stay primed for lift-off should Trump win November’s election”, said Steve Barrow.