What Trump’s victory means for the US dollar

After several dramatic moments and last-minute surprises, the 2024 US presidential election has finally concluded, with Donald Trump ultimately prevailing against Kamala Harris in the race for the White House.

Trump’s victory could have profound implications for both the US and global economies. His policy approach, often characterised by trade protectionism, tax cuts, and deregulation, may reshape market dynamics and investor confidence.

But what does this mean specifically for the US dollar and the broader FX market?

What has the immediate reaction been?

As it became clear that Trump was on his way to securing his second term in the White House, we saw the US dollar race to a new multi-month high.

A Trump presidency is seen as positive for the US dollar as his proposed economic policies, including tax cuts and tariffs, are likely to be inflationary and encourage the Federal Reserve to keep interest rates higher for longer.

Uncertainty over how a Trump presidency could upend geopolitics led to many of the US dollar’s peers weakening as results started to come in.

The euro proved the most vulnerable of the major currencies, amid fears that Trump’s tariffs could place even more pressure on the Eurozone’s struggling economy.

GBP exchange rates also fell as the National Institute of Economic and Social Research (NIESR) warned that US protectionism could effectively half UK economic growth over the next two years.

What might be the long-term impact of a Trump presidency on the FX market?

During his campaign, Trump pledged to reduce immigration and repatriate illegal immigrants. If he follows through on this, it could ultimately constrain the US economy by creating gaps in the US labour market.

Foreign-born workers currently comprise almost 20% of the US workforce as the plummeting birthrate in the US leads to more gaps in the domestic workforce.

If foreign-born workers are removed from the workforce, it will result in a tighter US labour market, raising both wages and inflation. For the US dollar, this labour squeeze and subsequent inflation could drive interest rates higher to counter inflationary pressures, driving the US dollar higher.

Questions will also be raised about the Federal Reserve’s independence. Trump repeatedly clashed with the US central bank during his first term in office, publicly pressuring Fed Chair Jerome Powell to lower interest rates.

During his 2024 campaign, Trump expressed his desire to exert greater influence on US monetary policy. Any move to undermine the Fed’s independence may be viewed negatively by markets and could weaken the US dollar.

Trump’s victory also carries increased geopolitical risk, with his tendency to conduct policy through social media potentially infusing similar volatility in FX markets as it did during his first term in office.

In terms of trade relations, Trump’s proposed tariffs could also set off ripple effects for other currencies.

Trump’s plan to pursue aggressive tariff policies, particularly with China and Europe, may lead to retaliatory measures that hurt growth both at home and abroad. The European Union, for instance, may counter with its own tariffs, putting additional strain on European manufacturers, some of whom might lack the pricing power to absorb these costs.

For the euro, this pressure could push the European Central Bank (ECB) into deeper rate cuts to sustain growth, leading to a further depreciation of the euro and potentially even resulting in it reaching parity against the US dollar.

In the UK, the forecast halving of growth could apply significant pressure on the pound in the coming years, although this may be cushioned by the expectation that Trump’s protectionist policies will lead to rising inflation and higher UK interest rates.

Navigating volatility with confidence

Donald Trump’s return to the White House is set to inject substantial volatility into the FX market, with both immediate and long-term implications for the US dollar and its peers. The anticipated economic policies, trade protectionism, and geopolitical uncertainties could drive significant fluctuations, making the FX landscape particularly challenging for individuals and businesses alike.

Currencies Direct offers tailored solutions for managing your foreign exchange needs, whether you’re a business navigating international trade or an individual looking to manage the impact of currency fluctuations on your personal finances. With expert guidance and a range of services designed to simplify complex FX transactions, Currencies Direct can help you navigate the challenges of a changing FX landscape with greater confidence and control.