Financial swing: An image of the US dollar in a currency exchange in Cairo. Emerging-market currencies are feeling the strain with almost all this year’s gains evaporating. — Reuters
REACTION to a second Trump presidency is principally a continuation of what global bond, equity and currency markets had been anticipating for several weeks.
But it’s missing one important factor – qualification on what policies President Donald J. Trump will actually seek to enact.
The greenback gained against other major currencies. For instance, Trump doesn’t like the US dollar too strong, or indeed interest rates too high.
In April, he called the 34-year high of the USdollar to the Japanese yen a “disaster”.
In a Bloomberg Businessweek interview published in July, he said the strong US dollar was a “a big currency problem” and a “tremendous burden”.
As recently as Tuesday, in a post on Truth Social, he said that the US dollar’s new peak would be a “disaster for our manufacturers and others”.
In other words be ready for important changes in rhetoric.
Views, like recollections as the late Queen Elizabeth II once opined, can vary. Another equally relevant person for market dynamics has yet to hold forth: US Federal Reserve (Fed) chair Jerome Powell.
Happily, he will be holding a press conference today, after the rate policy-making committee meeting. Although the Fed almost certainly will lower its Fed funds rate range by a quarter point to 4.5% to 4.75%, it’s all about what the Powell says on future rate guidance.
Any suggestion that its rate-cutting cycle will be amended will pile the pressure further on the recent surge in bond yields.
A US$25bil 30-year US Treasury auction tonight will be tricky to digest after a 25 basis point yield jump over the past day – the most violent move since March 2020.
Long-maturity yields have risen 70 basis points since the Fed surprised with an initial jumbo rate cut on Sept 17.
But equally, if the US central bank’s message is that business remains as usual to gradually reduce restrictive monetary policy, then it may draw a line under the recent bond rout – and in turn the US dollar’s strength.
Interest-rate differential favours greenback
The futures market expects the Fed to cut official rates by less than the European Central Bank (ECB) in the coming months.
Looking outside the United States, it’s easy to see where fears are playing out.
The rest of the world isn’t waiting around to price in Trump’s “America First” agenda.
Emerging-market currencies are feeling the strain with virtually all this year’s gains evaporating, with the Mexican peso weakening by more than 3% as it’s directly under the Trump spotlight.
The developed world is also digesting the threat of raised tariffs, trade wars and the second-order consequences of worsening international relations.
The euro suffered its biggest drop to the US dollar since 2016.
The prospects of a larger 50 basis-point rate cut at the ECB’s Dec 12 meeting have reappeared, and Goldman Sachs Group Inc analysts expect an additional quarter point rate cut by mid-2025.
After all, the eurozone is seeing rapid disinflation with all four major countries seeing October price rises well below the ECB’s 2% target.
US consumer prices to outpace eurozone
Inflation is expected to remain higher in the United States than in the eurozone in the coming year.
Shorter maturity eurozone government bond yields fell as much as 10 basis points on Wednesday as expectations grow that its export-led economy will be placed under further pressure by trade disputes.
It’s further steepened eurozone nations’ two-year to 30-year yield curves as fear of stagflation risks abound. Its strategic geo-political position is not looking pretty.
Again this might be being overblown. Bloomberg Economics’ analysis suggests if the United States imposes 20% tariffs on imports and trading partners retaliate in kind, Britain and European Union gross domestic product would only be about 0.2% and 0.1% lower by 2028.
Universal tariffs don’t make a huge difference to relative European competitiveness. ECB deputy president Luis de Guindos said on Wednesday in Frankfurt that “December is too soon to consider tariff impact”.
Sometimes talk is cheap, but for once we need to hear directly from the horses’ mouths. Until we have better clarity which direction precisely might the incoming president and the Fed chair be heading in, best be prepared to switch trains quickly. — Bloomberg
Marcus Ashworth is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
