Published: August 14th, 2024
An analysis by International payments firm Corpay ahead of next week's Republican national convention suggests a Trump win could be good news for US Dollar bulls.
The company's analysts believe a second Trump White House would likely have a protectionist bent, which would strengthen the Dollar but conversely act to undermine the administration’s efforts to reduce America’s ballooning trade deficit.
‘We suspect that the prospect of high tariffs will aggravate already low levels of implied volatility in foreign exchange markets,’ Corpay wrote.
America imports more than it exports, a situation aided by a strong Greenback. The result is a foreign trade deficit that’s grew from USD 74.5 billion in April 2024 to USD 75.1 billion the next month.
Republicans say the USD 1 trillion-a-year trade deficit in goods will be a major focus for an incoming administration. The plan is to expand baseline tariffs on foreign-made products, pass the Trump Reciprocal Trade Act, and fire back at any perceived unfairness in trading practices.
In the past, Trump has suggested raising tariffs by 60 per cent on Chinese imports and 10 per cent on all others. Corpay notes that would bring trade barriers back to levels not seen since the Second World War.
‘From the Corn Laws in 1815 to the Smoot Hawley Act of 1930, US protectionism can have a cooling impact on global growth.’
In the current environment, Corpay warns that raising tariffs could actually extend America’s trade deficit, an effect seen during the first Trump presidency. If the U.S. economy detaches from global markets, domestic inflation could rise.
That would push the Fed to adopt tighter monetary policy and drive USD higher.
In February, Economists at US bank Wells Fargo were forecasting US Dollar weakness in the second half of 2024.
In a monthly note to investors, the Main Street lender said it was sticking with an earlier call for Dollar depreciation in late 2024.
'While robust economic performance and a cautious Federal Reserve have supported USD in the first quarter of 2024, as the year progresses, we still see slower growth, even if America manages to avoid recession’.
When 2024 began, Greenback weakness across the year was the consensus call. Cooling disinflation, a strong Federal Reserve and a US economy that’s largely defied gravity has caused some institutional economists to revise their thinking.
As of the second quarter of 2024, USD was the best-performing fiat for the YTD. At the time, dollar outperformance affirmed a contrarian view in the analyst community predicting ongoing Dollar strength. The Forex Strategy unit at Crédit
Agricole had been pro-Greenback for months, and said it still believed Dollar strength would be a defining feature of 2024. Wells Fargo noted that inflation trends were gradually improving.
‘We are looking for the Fed to start lowering interest rates starting in June or July. If a US economic slowdown does happen in parallel with recovery at key foreign economies, the growth swing could weigh on the Greenback, however,’ said the bank’s recent analyst note.
Wells Fargo's profile for the Pound to Dollar rate saw more weakness extending to year-end, with 1.25 forecast for the end of June. The bank had a Euro-Dollar exchange rate of 1.07 at mid-year and predicted it would reach 1.09 by year’s end.
A parallel survey of fund managers by Bank of America (BoA) found a shared view amongst economists that the Eurozone was on a path to growth.
A net 20 per cent of those surveyed said they believed a stronger European economy would emerge in the next twelve months, up from the previous month when a net 11 per cent of respondents were expecting more weakness.
An analyst commentary summarizing the findings said that the result marked ‘the first time in two years of polling that respondents have not predicted a looming recession in Europe.’
The survey was expected to lend support to a recovery in the EUR/USD rate, which had been squeezed since 2021 when upward growth rates in the US diverged sharply from a moribund Eurozone, giving traders a clear rationale for offloading the pair.
In contrast to the expected reversal in Eurozone fortunes, the proportion of fund managers who saw ongoing US growth held steady at 58 per cent, effectively unchanged from the previous month’s result, but up from 28 per cent recorded in January 2024.
Around 61 per cent thought the most likely outcome for the global economy this year would be a soft landing, with roughly one quarter expecting no-landing, up from 20 per cent in February and just six per cent in December 2023.
Around 40 per cent believed falling inflation paired with healthy growth would be a dominant macro issue over the next two quarters, up from 27 per cent last month. BoA said investors believed European equities could continue to rise, with 64 per cent of those surveyed looking for further near-term gains.
In the first week of May 2023, the Euro underwhelmed against all G10 peers except the Dollar. EUR only rose in relation to the Brazilian Real, Turkish Lira and Chinese Renminbi on the broader G20 table, however some analysts believed it would stay a laggard for the near term.
EUR started experiencing losses when European Central Bank (ECB) President Christine Lagarde said that interest rates would likely be raised again soon, at least until Frankfurt policymakers believe that their monetary decisions have become restrictive enough to send inflation back down to the central bank’s two per cent target.
EUR saw further declines when German state statistics agency Destatis announced that the country’s manufacturing orders fell more than 10 per cent in March 2023, the biggest one-month decline since the onset of the COVID pandemic. The figures followed a Eurostat print which indicated that European retail sales dropped a full percentage point in the same month.
