The political risk to financial markets resulting from elections was a concern for investors in emerging markets, and investors in wealthy countries were paying attention to central bankers, not politicians, but things are a little different today, and in the run-up to the US presidential election on November 5. In November, asset prices moved in response to opinion polls, at a time when there was repeated talk about Trump trades or “Trump Trade,” according to what the British newspaper “The Economist” reported.
These trades are based on the idea that management… Donald Trump The second would be positive for US stocks, bad for Treasuries (but not terrible), and great for the dollar, as it would increase stock returns due to lower corporate taxes and deregulation.
These trades are also based on the fact that these same tax cuts would increase government borrowing, lower bond prices and raise returns, but not enough to destabilize the US economy and hit stock market returns, and all of this would raise the value of… Dollarwhich moved in line with Interest on 10-year US bonds in recent years, according to the newspaper.
Strange bet
The newspaper stated that it may seem strange that the possibility of financial deterioration and faster price rises may be positive for the US currency. In general, currencies lose their value when public finances deteriorate and rates rise. InflationBut the dollar plays a unique role in the global financial system as an ultimate source of safe liquid assets, and higher returns tend to be higher. Bonds The Treasury sought to make holding dollars more attractive, even when they were the product of financial extravagance.
Those who bought assets likely to rise with Trump’s victory expect this dynamic to continue. They also believe that Trump’s threat to increase tariffs would raise the value of the dollar. Impeding imports would lead to fewer dollars leaving the United States, pushing the greenback’s price to Height.
But there are at least 4 ways in which Trump can weaken the dollar, which calls for caution against Trump’s trades, and they are as follows, according to what the newspaper reported:
1- Monetary policy
Trump may take a stronger line Federal Reserve Board (Central Bank) compared to its first term, by intimidating the institution to force it to keep interest rates low or even interfering with its independence.
There are many reasons to believe that the Fed may resist Trump, but if he succeeds, cutting interest rates below the appropriate level with inflation will lead to a weaker dollar.
Trump will not be bothered by this result, as he told Bloomberg that America “suffers from a major currency problem.” He believes that the strength of the dollar – which Trump blames in part on currency manipulation by trading partners – has harmed American manufacturers by making their goods less competitive compared to their counterparts at the international level (higher in price taking into account exchange rates for importers), and thus costing them jobs.
Robert Lighthizer, Trump’s trade adviser, is another critic of the dollar’s strength.
2- Customs tariffs
According to the newspaper, wanting to weaken the dollar is one thing, but actually weakening it is quite another, and most traders expect Trump to complain that the dollar was too strong even as his policies pushed the currency higher. However, there is a chance that his tariffs represent the beginning of negotiations to recruit partners. Traders are in a collective effort to bring down the dollar, as happened during the era of Ronald Reagan in the 1980s, which is a second reason to be wary of Trump’s trades.
3- Commercial disputes
Historically, central banks have tended to raise the exchange rate in the short term, then lower it in the longer term. The initial effect of more trade rivalries is often a decline in imports and exports, as well as a weak domestic economy. A weak economy will then lead to lower interest rates, which It reduces the attractiveness of the currency and causes it to decline.
4- Foreign policy
Barry Eichengreen of the University of California, Berkeley, noted in a 2019 article that countries with a US security guarantee hold more of their reserves in the currency of the guarantor power.
Eichengreen, who studied the geopolitical foundations of international currencies, gave the example of Japan, which maintains a larger percentage of its reserves in dollars compared to China, and even Germany maintains a higher percentage of its reserves in dollars compared to France, which possesses its own nuclear weapon.
Therefore, if America abandons its security promises to its allies, as Trump has threatened from time to time, Eichengreen and his colleagues believe that US interest rates may rise by about 0.8% and the dollar will fall.
