Markets may also witness significant fluctuations during and after the election period, as they are more vulnerable to being directly affected by the repercussions of the electoral results.
Emerging market currencies face additional pressure from the results of the US elections, as these currencies are highly sensitive to global economic changes, and with the victory of a candidate who adopts strict trade policies, these currencies are exposed to major risks. While capital usually heads to safe assets such as gold and the dollar, which may weaken emerging market currencies and increase inflation and import costs for these countries, especially if they adopt pressure economic policies against these markets.
The high or low interest policy followed by the US President-elect clearly affects the strength of… Dollar Global. If the new president takes a path to tighten monetary policy, demand for the dollar may increase due to rising returns on US assets, which will put pressure on other currencies. If the administration follows flexible policies, this may lead to a weakening of the dollar, giving other currencies an opportunity to recover.
Weakening the dollar
Executive Director at VI Markets Ahmed Moati, tells the website “Eqtisad Sky News Arabia”:
- impact Trump On currencies in particular, and on American economy And global in general, it will be gradual and in stages.
- If Trump wins, he will likely not take decisive action in the first three months, and his impact may be limited at first.
- However, the concern this time stems from the possibility of tensions occurring on the ground if he does not win, as some expect them to escalate into major skirmishes that may reach the point of civil war, given the enthusiastic support of his supporters and their willingness to escalate.
- Regarding the impact of his policies on the dollar, the decisions that Trump intends to make may weaken the dollar.
- For example, his decision to reduce corporate taxes may raise inflation in the medium and long term.
- With the accumulation of US debt to historical levels of around $36 trillion, and the presence of large government spending, the consequences of this negatively affect the value of the dollar and weaken its purchasing power. As a result, the Federal Reserve may have to adopt a more aggressive policy, such as gradually raising interest rates, to curb inflation.
He added: “With regard to foreign policy, Trump’s intention to impose new taxes of 60 percent on Chinese products and 10 percent on the rest of the imports will increase inflation, which in turn will lead to a gradual weakening of the dollar, as we witnessed during his previous term,” explaining that his statements Repeated Trump leads to sharp market fluctuations, which enhances instability. Therefore, the impact of his policies cannot be predicted over a full four-year period, but rather their impact must be viewed in stages.
This is consistent with an analysis by Capital Economics, which stated that the increasing economic and geopolitical uncertainty that may follow the potential victory of former US President Donald Trump in the US presidential elections this November would lead to a weakening of the dollar against traditional safe havens such as the Japanese yen. Gold prices may also rise.
According to the report, concerns about the possibility of China abandoning US assets and the possibility of further delay before the Federal Reserve raises interest rates are likely to weaken the dollar against the euro and the pound as well. But the dollar is likely to strengthen against most emerging market currencies.
Fluctuations
Traders are preparing for a rise in currency fluctuations around the world after the cost of hedging dollar movements over the next week rose to the highest since early 2020, according to a Bloomberg report.
The options market shows that investors expect to see significant fluctuations in the prices of G10 currencies, especially in the Japanese yen, Norwegian krone and New Zealand dollar. The Mexican peso, Chinese yuan and South Korean won also appear vulnerable.
Trump’s policies
However, speaking to the “Eqtisad Sky News Arabia” website, Dr. Nidal Al-Shaar, economic expert and chief economist at ACY, confirms that since the beginning of Trump’s campaign, he has stated on several occasions that he seeks to reduce the exchange rate of the dollar with the aim of encouraging exports from the United States of America and supporting industries. Locally… However, if we look at the economic policies proposed by Trump and members of his election campaign, we find that they do not serve this goal for several reasons, including:
- First, if we take into account the tax policies that Trump promised to follow once he assumed the presidency, which is to reduce tax rates on individuals and companies, we will find that this reduction will free up a portion of the income of individuals and companies. This freed income will go to the markets, which will lead to increased demand and pressure on prices, raising inflation rates.
- High inflation, in turn, will prompt the US Federal Reserve to raise interest rates to combat inflation, and this raise will increase demand for the dollar, and thus the value of the dollar will rise against other currencies, especially against the Chinese yuan, by a rate that may reach 60 percent.
- As the dollar rises, prices will increase again, which may force the Federal Reserve to raise interest rates again to combat inflation, leading to another increase in the dollar exchange rate.
- Second, with regard to immigration and illegal immigrant policies in the United States, limiting immigration or returning immigrants to their countries may have negative effects. Immigrants – whether legal or illegal – work for American companies that employ them thanks to their acceptance of low wages, often at the minimum, which the average American citizen cannot accept.
- If Trump is able to return immigrants to their countries, American companies will be forced to employ American citizens at higher wages, which will cause pressure on the general level of prices, and once again the Federal Reserve will be forced to raise interest rates, which will raise the value of the dollar against other currencies.
He explains that if Trump implements these economic policies related to taxes, protecting local industry, and immigration, this will inevitably lead to an increase in the value of the dollar compared to other currencies. If we take the euro as an example, the relationship will be direct, as the euro’s exchange rate will fall as a result of the rise in the value of the dollar. This effect will extend to countries with monetary policies similar to the United States, such as the Eurozone, the European Union, Canada, and Australia, where a stronger dollar will lead to a decline in the value of their currencies.
As for emerging countries, the impact will be double, because most of these countries follow a flexible policy regarding exchange rates, which may lead to disturbances in the black markets for these currencies, according to Al-Shaar, who adds: As for Japan, it will not be directly affected by the rise in the value of the dollar. Because the exchange rate of the Japanese yen is governed by objective and subjective factors related to the economic policy in Japan, especially the expansionary monetary policies that it has followed for more than 35 years, and therefore the effect will be indirect.
He explains that with regard to the Russian ruble, it is a special case as it is exposed to international pressure from the European Union countries, the United States, and Canada due to the sanctions imposed on Moscow, which has and will greatly affect the ruble’s exchange rate. Although the rise in the dollar may have an impact on the ruble, it will not be as direct as in the euro zone.
How might the Euro be affected?
According to a report by Euro News, analysts indicate that the re-imposition of large-scale US tariffs would strengthen the US dollar while adding downward pressure on the euro.
The report quoted Goldman Sachs analyst Michael Cahill, in a recent note, as saying: “Tariffs have a direct impact on exchange rates.”
The investment bank expects that if Trump wins and Republicans gain control of Congress, this would strengthen the case for a “strong response to the dollar,” with tariffs coupled with domestic tax cuts.
This policy shift would also have repercussions for monetary policies on both sides of the Atlantic. Goldman Sachs chief economist Jan Hatzius estimated that a 10 percent blanket tariff would lead to a shift of between 150 and 200 basis points in the spread between interest rates between the United States and the eurozone.
The resulting political divergence could weaken the euro by up to 3 percent, or even 10 percent in a scenario that includes broader tariffs and tax cuts.
While the euro has recorded four consecutive weeks of losses, ING Bank foreign exchange analyst, Francesco Pisol, noted that the recent weakness was driven more by variation in economic data than electoral risks, with the US dollar gaining strength due to strong consumer spending and a review of growth. rising in the United States.
Aside from the euro, Trump’s proposed tariffs could lead to fluctuations in other currencies, especially those linked to commodity exports and emerging markets. ING analysts note that the Australian and New Zealand dollars may see greater volatility within the G10, while the Mexican peso and several Asian currencies may be particularly vulnerable to trade-related shifts.
According to BBVA analysts, the Trump administration may lead to greater economic and geopolitical uncertainty by reassessing US commitments to NATO and Ukraine, expectations that may put additional pressure on the euro.
Strong dollar!
In this context, the Head of the Global Markets Department – Cedra Markets points out A pleasant atmosphere for the “Eqtisad Sky News Arabia” website:
- If Trump wins the presidency, some analyzes indicate that this will strengthen the US dollar (contrary to what is being promoted about weakening the dollar). The strength of the dollar will certainly put pressure on several currencies and affect future markets.
- If Trump follows through on his campaign promises, we may see instability in financial markets. Proposals have begun to appear to impose taxes of up to 10 percent, and he is also seeking to impose additional taxes on China, which will lead to an escalation of the trade and economic conflict with it.
- This tension will create a state of instability, which may cause weakness Chinese yuan As a result of the trade war and economic problems.
- This, in turn, will lead to volatility in financial markets, making emerging countries’ currencies vulnerable and weak, given their export dependence.
- Any additional strength of the US dollar will put pressure on these countries, and with the rise of the dollar, capital is expected to flee towards the United States as a safe haven.
- On the other hand, safe haven currencies, such as the Japanese yen and the Swiss franc, will benefit from this situation. I believe that the Swiss franc will benefit the most due to the political and economic stability in Switzerland.
- As for Japan, although it has historically been considered a safe haven, the recent instability, weak interest rates, and the difference between Japanese and American interest rates may limit its benefit compared to Switzerland.
Japan yen
Another Bloomberg report stated that despite all the weakness that the yen witnessed this year, history shows that the Japanese currency is still on its way to being a surprising haven for investors looking for a safe haven to escape the US presidential elections.
Data compiled by Bloomberg showed that the Japanese currency outperformed the US dollar, the Swiss franc, gold, Treasuries and the euro – among the most popular safe-haven assets – before the last election. In the run-up to the vote on November 5, the yen is once again the top performer during periods of extreme market stress, according to a Bloomberg analysis of moves in safe-haven assets and implied volatility in US stocks.
