Will the US dollar rise if Trump wins again?

>> Major currencies could be more volatile around election time

Global investors are increasingly being forced to grapple with the possible economic and financial market connotations of a second term for former President Trump. Higher stocks, higher yields, and a higher dollar seem to be the themes. But should this be taken as a given?

There are clearly many unknowns when it comes to the US election: will it be contested between Trump and Biden, who will win, will the results in Congress give the new president a strong mandate, and will Trump act on areas such as migration and tariffs as he has suggested? With betting markets now putting a 65% probability on a Trump victory, it seems reasonable to use a Trump win as the Standard Bank's base case, or at least a scenario with sufficiently high probability that it cannot afford to ignore its possible consequences.

We may glean more about the policies on offer at this week’s Republican National Congress, but clearly the three areas that have attracted most attention are increased tariffs, a crackdown on migration, and tax cuts. They have attracted attention because all three are seen as inflationary and could therefore provoke a different outlook for monetary policy than the one the market is pricing at the moment.

A corollary of this is that a second term for Trump is perceived as being bullish for the dollar, not just because of this risk of higher policy rates but perhaps also because a second Trump term could lead to geopolitical tensions that feed the dollar’s safe-asset status.

The question now is whether financial market players should gear up for a dollar rally to begin should Trump win in November, or even prepare themselves for US dollar strength now as opinion polls are already suggesting that a Trump victory is very likely.

However, it seems that the FX market is wary. This is because the election is still some months away, and the political landscape could still change significantly. It is also because the Fed seems to be gearing up to start an easing cycle ahead of the election. But on top of these considerations, there is another factor that should engender caution when it comes to any post-election rally in the US dollar.

The issue in question is the policy towards the dollar of any new Trump administration. For we should not forget that the dollar is strong; it is overvalued on many measures, and its strength has already been decried by Trump during his first term (when the dollar was lower than it is today).

>> How political events impact major currencies

During this first term, there was no active US dollar policy in place. Trump might have bemoaned dollar strength but nobody else of note within the cabinet seemed to do so. Hence, this time around, we’d be most interested in Trump’s pick for Treasury secretary. Again, this might be something where we get a bit more clarity during this week’s Republican convention.

If it is former Trade Representative Robert Lighthizer, it could prove a red rag to the dollar bears, as he seems to be lobbying already for a policy to weaken the dollar. No doubt Lighthizer is concerned that if a second term for Trump sees higher tariffs (with a general 10% tariff talked about for all imports and a special rate of up to 60% for China) their impact could be undermined by dollar strength.

At this stage, it is not at all clear that Lighthizer might get the job, but, even if he takes another position, he seems likely to lobby for action on the dollar, particularly if it appreciates significantly. Now clearly, just because a new Trump administration might be determined to avoid excessive dollar strength does not mean that it will be successful. Trump’s complaints about US dollar strength during his first term fell on deaf ears.

Success on this front, if desired, may require FX intervention at a minimum and could still prove elusive if the action is not supported by easier policy from the Fed. Clearly, this just adds another level of uncertainty on top of the multiple layers of uncertainty that already exist.

“We suspect that this will continue to make investors wary of placing any big FX bets on the election outcome, and, as a result, the dollar may continue to flatline for a while, even if the post-election stakes look pretty high for the greenback”, said the Standard Bank.