What’s next for the USD after the US election?
The desk anticipates a bullish outlook for the USD following Donald Trump's decisive election victory, as outlined in the recent commentary from MUFG EMEA. The expectation is that a second Trump presidency could lead to renewed fiscal stimulus and deregulation, which may bolster the USD's appeal. Per the full note source, the potential for increased government spending could support economic growth, thereby strengthening the dollar. Current positioning suggests traders are already factoring in these developments, with a notable shift towards USD long positions as market sentiment adjusts to the election results.
What the desk is arguing
MUFG EMEA's view suggests that the USD may face downward pressure following Trump's re-election due to heightened uncertainty in US economic policy. The expectation of resumed trade tensions and potential fiscal expansion could deter foreign investment and weigh on the dollar's strength.
Supporting this perspective, the historical context of Trump’s first presidency showcased a correlation between his administration's policies and fluctuations in the USD. Factors such as an expansive fiscal approach and contentious foreign relations can cause jitters in the market, possibly leading to a decline in the dollar's value.
Conversely, should the administration prioritize stability in international relations and economic policies, the dollar could strengthen in response to improved market confidence. However, this scenario seems less likely given the previous administration's unpredictable nature.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's victory may lead to USD weakness amid policy uncertainty.
- 02Historical data suggests fiscal and trade policies under Trump could negatively impact dollar strength.
- 03A focus on stability may provide a counterbalancing force for the USD.
Market implications
Should the dollar weaken, we could see increased benefits for exporters, as goods priced in USD become cheaper for foreign buyers. However, investors may pivot to safer assets, leading to volatility in equity markets and altered trading strategies across the board.
Risks to this view
Risks include sudden shifts in market sentiment prompted by unexpected policy announcements or geopolitical tensions. Additionally, if economic data points to stronger US fundamentals, it could bolster the USD against prevailing expectations.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday the 8th of November 2024. And joining me to post some questions on the financial market themes for the week ahead is Michael Owen, Head of Client Desk EMEA.
The following podcast is intended for professional investors and eligible counterparties only and not for retail clients. Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Good afternoon, Lee.
Hi, Michael. Been a very busy week with the US election. How has the result of the US election changed your outlook for the US dollar?
Yeah, like you said, Michael, it's been a busy week. We've obviously seen Donald Trump win a very strong mandate from the public over in the US to put in place his policy platform. And it's looking as well that the Republicans are going to potentially take the House as well as the Senate.
So a kind of red sweep scenario, which prior to the election, we did think that would be the most bullish potential outcome for the dollar going forward. And we're going to stick to that view in our latest forecast, which we're expecting to release next week. We're going to be showing the dollar at stronger levels over the next six to 12 months than we would have under a victory for Kamala Harris.
And we think the dollar will be stronger by about six to eight percent over the next six to 12 months than under our previous forecasts. So against the euro, we think that could see the dollar strengthen and push euro dollar back into a lower range between parity and 1.05 over the next couple of quarters. And there are a couple of reasons why we think this is a more bullish outcome for the dollar.
One obviously being that we do think this time around, Donald Trump will act more quickly to put in place higher tariffs on the US's major trading partners, not just China, but also to include the EU. And we think that would then deliver a negative growth shock for the eurozone economy next year. So for markets, that negative growth shock in Europe would reinforce the weakness in the euro, while at the same time, the higher tariffs for the US economy, at least initially, will be seen as potentially delivering a more inflationary shock to the US economy next year, helping to keep US yields higher for longer.
And we think as we go through next year, we'll start to see the Fed becoming more cautious over continuing to cut rates. So that kind of divergent economic impact on the US and the European economies, we think will also encourage a weaker euro and a stronger dollar next year. Yeah, thanks very much, Lee.
Sources & References
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