The dollar slightly declined in the second half of last week, but regained ground towards the end of trading on Friday, a trend possibly linked to the latest polls concerning the US presidential elections. According to these surveys, the likelihood of Donald Trump winning is increasing and, at this point, that seems to be the main scenario for most market participants. The future appreciation of USD will also depend on whether the Republicans manage to take control of both chambers of Congress, as this will determine how much freedom of action the potential new president could have.
There appears to be a fairly straightforward interpretation on the market that American tariffs give US-made goods an advantage over products from the rest of the world. This can also be explained in a different way – that producing products in the US becomes more profitable because taxes can be avoided. Investing capital in the United States becomes more advantageous than elsewhere and this requires the American currency, hence its appreciation. Of course, the market is always ahead of the future and is already discounting what may happen in some time.
There are, of course, many threats. The imposition of higher tariffs may also take place parallel to other actions, such as those related to immigration policy. If it came to the actual deportation of hundreds of thousands of people, wages could consequently rise, as the demand for workers would increase. Keeping margins at a constant level will result in higher final prices, which would be paid by consumers, fueling inflation in the medium term.
There is little talk about the potential threat to the Federal Reserve’s independence in the event of Trump’s victory. The market seems to not price in this risk. The former president repeatedly stressed that he would make better decisions than experts from the Federal Reserve. However, his previous presidency shows that the Fed “survived” the first term without significant damage to its independence, so perhaps this threat is somewhat underestimated. We do not know, however, what Trump’s intentions are and whether his team will be better prepared this time to influence monetary policy.
Łukasz Zembik, Oanda TMS Brokers
Source: https://ceo.com.pl/dolar-zyskuje-wraz-ze-wzrostem-szans-trumpa-rynek-wycenia-mozliwe-zmiany-gospodarcze-i-polityczne-85086
