Key points
- Trump’s re-election has reignited debates about his economic and immigration policies. While Trump’s tariffs aim to narrow the trade deficit and boost GDP, broader economic forces, including investment, remain critical to USD resilience. The Fed’s policies also play a significant role.
- Trump faces a significant challenge in managing the US debt-to-GDP ratio, which has doubled over the past two decades. Addressing the already high budget deficit, further strained by Trump’s proposed tax cuts, will be critical to maintaining fiscal stability.
- Mass deportations, a cornerstone of Trump’s immigration stance, may weigh on economic growth, inflate labour costs, and increase federal expenditure, though targeting only criminally convicted immigrants may limit these effects. Contributing towards inflation may lead to interest rates being higher than they otherwise might have been, in turn supporting the USD.
Baseline view:
One cannot conclude with any certainty that the Trump administration will either be good or bad for the USD or the US economy. While it may be disruptive, it is too soon to tell what that might look like. Suffice it to say that the “obvious” weaker USD trade needs to be reconsidered.
It is possible that the Trump administration will generate another environment of US exceptionalism characterised by fiscal stimulus brought about by tax breaks and tighter monetary policy to enhance the USD carry trade and bolster the expected returns of capital markets.
That must be weighed against the expense of the USD trading deep in overbought territory, which asymmetrically looks too expensive to be sustainable over the long term.
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